Unit 4: packaged investments
What are the 7 characteristics of mutual funds?
1. A professional investment adviser manages the portfolio for investors 2. Mutual funds provide diversification by investing in diff companies or securities 3. Most funds allow a minimum investment of $500 or less to open an acct, and allow additional investment for as little as $25 4. May allow investments at REDUCED SALE CHARGES based on the amount investment 5. ** investor retains voting rights similar to those extended to common shareholders. 6. Mutual funds must offer reinvestment of dividends and capital gains at NAV. (Without a sales charge) these reinvestment are taxable 7. Form 1099, tax liabilities
What are the key defining points of rights of accumulation? (3)
1. Available for subsequent investments and do not apply to initial transactions 2. Allow investor to use prior share appreciation to qualify for breakpoints 3. Do not impose time limit
Investment Company Act of 1940 classifies investment companies into which three broad types?
1. Face-amount certificate companies (FAC) 2. Unit investment trusts (UITs) 3. Management investment companies
Suppose a fund company offers a fund with a 5% sales charge and investor wants to invest 10,000. Because 5% of the 10,000 investment must be allocated to sales charge, only 9,500 is actually going to purchase fund shares. What is the formula? How do you get $9,500?
10,000 X 0.05= $500 sale charges $10,000 invested - $500 sales charge = $9,5000
What is an investment company?
A corporation or trust that POOLS investors' money and invests that money in securities on their behalf. The objective is on growth and income for these investors.
Exchange Privilege
A feature offered by a mutual fund allowing an individual to transfer an investment in one fund to another fund under the same sponsor without incurring an additional sales charge. Aka conversion privileges
Omitting Prospectus (SEC Rule 482)
A mutual fund advertisement or tombstone. Just an announcement, not for recommendation
Letter of Intent (LOI)
A person who plans to invest more $$ with the same mutual fund company may immediately decrease the overall sales charges by signing a LOI. In this document, the investor tells the company of the intention to invest the additional funds necessary to reach the break point within 13 months * this is a on sided contract binding ONLY THE FUNDS
In order to achieve a better breakpoint what do mutual funds allow investors to do?
Allow investors to combine orders among related accounts in order to achieve a better breakpoint. Families may combine an order to accomplish this.
What do reinstatement provisions of mutual funds allow?
Allow investors who withdraw funds to reinvest up to the amount withdrawn within 30 days with no new sales charge. This provision must be in PROSPECTUS and is available ONE TIME ONLY
Class B (back-end load) shares
Also called a contingent deferred sales charge (CDSC). A back end sales charge is paid at the time when an investor has redeemed his shares. The sales load, a declining percentage charge reduced annually (8% the first year, 7% the second year, 6% the third year)
What happens when an investor is $2k or less toward the next breakpoint?
An RR would be required to inform the customer that for $2k or more, the investment amount would qualify for the next breakpoint
Unit Investment Trust (UIT)
An investment company organized under a trust indenture. UIT create portfolio of debt or equity securities. AND sell REDEEMABLE interests/units/shares of beneficial interest in their portfolio securities. Each share is an undivided interest in the entire underlying portfolio.
Variable Annuity
Annuity that has a varying rate of return based on the mutual funds in which one has invested
How do you calculate a fund's NAV?
Assets - liabilities
How to calculate the NAV per share?
Assets - liabilities : # of outstanding shares
Why is it that with Class B shares, the full investment amount is available to purchase shares?
Because no sales charge is applied at the time of purchase, it is deferred to the time of redemption. If an investor wants to invest $10K, the entire amount is available to purchase shares.
What type of investors do class B shares?
Best for investors will smaller investments and long time frames (to get past the contingent loads(
Class C shares are best for what type of investor?
Best for investors with short time frames (1-5 years)
What does an equity fixed UIT do?
Buys a portfolio of stocks and (bc stocks don't have a maturity date) terminates at a predetermined date. There is no need for active management and little to no portfolio turnover.
How do closed end investment company raise capital for its portfolio?
By conducting a COMMON STOCK OFFERING. in the initial offering, the company registers a fixed number of shares with the SEC and offers them to them public with a PROSPECTUS for a limited time through underwriters.
How do investment companies raise capital?
By selling shares to the public.
What is the ONLY investment company that trades in the secondary market?
CLOSED END MANAGEMENT COMPANIES.
What type of investors do class C (level-load) shares?
Class C shares are for investors who have short time horizons because the annual charges make them expensive to own if investing for more than four to five years.
What is the difference between a closed-end and open-ended managed investment company?
Closed ended company IPO Is limited of shares. (IPO closes after specific authorized number of shares have been sold) Open-ended company is ALWAYS offering new shares to the public.
What kind of securities do closed end investment companies issue?
Common stock, preferred stock, and debt securities.
What are managed investment companies?
Company that actively manages securities portfolio. Both closed- and open-end companies sell shares to the public in an IPO.
What does CDSC mean?
Contingent deferred sales charge aka class B shares (back end load)
Face Amount Certificate
Debt certificates that offer pre-determined interest rates. Issuer guarantees payment of stated face mount sum to the investor at some date set in the future. *in return for this future payment, the investor agrees to pay the issuer a set amount of money, either as a lump sum or in periodic installments. Very few FAC companies operate today
Variable annuities have subaccounts that are defined as what type of investment company?
Defined as either UITs (unit investment trust) or Open-Ended Management investment company
An investment company's portfolio is elastic or no?
Elastic. Money is constantly being invested on paid out when shares are purchased or redeemed.
What are two types of annuities?
Fixed and variable annuities.
What type of pricing do open end funds use?
Forward pricing!!
What factors are considered when a customer chooses to annuities a variable annuity?
Gender, age, acct balance, payout options and assumed interest (GAAPI)
Class C (level-load) shares (too many fees)
Have a one year, 1% CDSC, a 0.75% 12b-1 fee And a 0.25% shareholder service fee. These fees never go away
How may mutual funds be purchased?
In fractional shares or full. Investors can think in terms of dollars rather than number of shares owned.
What is an annuity?
Insurance contract designed to provide retirement income. The actual amount to be paid out May or may not be promised but the stream of payments itself.
Who is the investment company regulated by?
Investment company act of 1940 In regards to how their shares are sold to the public
What type of investors do class A shares?
Investors with LARGE investments (to get breakpoints) and longer time frames (spreading the one time cost over several years)
If the investor pays for his certificate (within a FAC investment company) in a lump sum, what is the investment known as?
Known as a fully paid FAC (face-amount certificate)
Rights of Accumulation
Like breakpoints, allows an investor to qualify for reduced sales charges.
What is another term for sales charge?
Loads
Advantage of using an investment company?
Low risk because investing the pooled funds as a single large account allows the investment company to invest in many different securities and reduce the risk associated with investing in only one or few.
breakpoint sales
Meaning sales JUST below the breakpoint
How many times a day do mutual funds calculate the NAV?
Minimum of once per business day. With sellers receiving the next calculated NAV and buyers paying the next calculated POP. All transition requests must be entered by 4:00pm.
Because an annuity can provide income for the rest of someone's life, the contract has what type of guarantee ?
Mortality guarantee
What is another term for open end investment companies?
Mutual funds
What is NAV
Net asset value. NAV = (assets - liabilities / # of outstanding shares
Is there a limit to the annual contribution amounts of commercial (non qualified) contracts?
No
What is an open-end company?
Only issues ONE CLASS of security, which is common stock! Raises an unlimited amount of investment capital by always issuing new shares.
What falls under management investment companies?
Open-ended (mutual fund) and closed-ended Then under those, diversified or no diversified
Another definition for Class B (back end load) shares?
Pay sales charge later at time of redemption.
What is the ask price?
Price at which an investor can buy
What is a bid price?
Price at which an investor can sell
What does a fixed annuity promise?
Promises a stated rate of return. Therefore it is the insurance company who is at risk to provide the rate of return it promised. The investor assumes NO risks with fixed annuity. This product is not considered a security.
Closed end investment companies are often called what?
Publicly traded funds. After the stock is sold in the IPO. Anyone can buy or sell shares in the secondary market (on an exchange or OTC) in transactions between private investors..
Even though mutual funds only issue common shares to their shareholders, the funds can do what?
Purchase common stock, Preferred stock, and bonds.
What are the fees associated with no load shares?
Purchase fee, account fee, exchange fee and redemption fees. These are not considered sales charges
What do nonfixed UIT do?
Purchase shares of an underlying mutual fund
What does a debt-fixed UIT do?
Purchased a portfolio of bonds and terminates when the bonds in the portfolio mature.
What are breakpoints?
Quantity discounts on open-end management company shares aka MUTUAL FUNDS Basically, the greater the dollar amount of a purchase, the lower the sales charge For example: if you invest $50k the sales charge is 2% but if you invest least than $10k the sales charge is 8.5%
The class b (back end load) shares is structured how?
Structured so that the sales charge drops to zero after an extended holding period (usually no longer than five years. And the the shares are converted to Class A shares, and no sales charge would be applied at the time of redemption.
Both closed end funds and ETFs trade in the marketplace based on what?
Supply and demand.
What determines the bid and ask price in trading?
Supply and demand.
When a client acquires mutual fund shares she pays what?
The current Public Offering Price (POP)
Annuities and variable annuities include what benefit?
The death benefit. Beneficiaries will receive the greater of the contribution amount or the current value if the owner dies during the accumulation period.
What is the difference between class A, class B, and class C shares of mutual funds?
The differences among these shares are how much and in what way investors will pay sale charges (loads) and related expenses.
Annuitization
The election to receive payments from the annuity for life, or for a specified period depending on the settlement option selected. An investor who teaches retirement may choose to annuities her contract. This is a ONE TIME and irreversible election to give up ownership of the assets of the annuity in return for lifetime guaranteed by the insurance company.
What happens when an investor wants to sell their holdings in a mutual fund?
The fund itself redeems those shares at the fund's current NAV
When an investor sells shares back to the fund (the fund is redeeming the shares) what happens?
The fund sends the investor $$$ for the investor's proportionate share of the fund's net assets.
What is a separate account? (A type of security)
The premium payments for variable annuities are invested in a separate acct. the separate acct has many sub accounts that behave like the diversified portfolios of mutual funds. The returns in the separate account are NOT promised. A loss of principal is possible.
What is NOT part of the expense ratio?
The sales charges (loads)
If the investment manager of an insurance company is responsible for selecting the securities that are to be held in the separate account, who must register and manage the account?
The separate acct is directly managed and must be registered under the investment company act of 1940 AS AN OPEN END MANAGEMENT INVESTMENT COMPANY.
If the investment manager of insurance company passes the portfolio management responsibilities to another party, who is the new manager and what is the registration process?
The separate acct is indirectly managed and must be registered as a UIT under the investment company act of 1940.
What do FACs and UITs have in common?
They are no managed. And once the portfolios are composed, they DO NOT CHANGE. They also do not trade in the secondary market. They are redeemable only through issuer
What do UITs (unit investment trusts) NOT have!
They do not have BOD. Only trustees
How are mutual fund shares like FACs and UITs?
They do not trade in the second market.
How may closed ended fund shares trade?
They may trade ABOVE (at premium) or below (discount) the shares' NAV.
Who must the investment company abide by?
They must abide by the same registration and prospectus requirements imposed by the securities Act of 1933
Mutual Fund Prospectus
This is a full statutory prospectus. A description of the mutual fund, including the fund's objectives and risks, its historical performance, its expenses, the manager's history, and other information. Discloses 1-, 5-, 10 year performance history
Appreciation and reinvested dividends do not count toward the LOI. True or false.
True
FINRA does not define near or just below breakpoint or how close a purchase can be to a breakpoint triggering a violation. Therefore members must make certain that customers are advised of a funds breakpoint schedule. True or false.
True
If a customer has not completed the investment within 13 months, he will be given the choice of sending a check for the difference in sales charges or cashing in escrowed shares to pay the difference. True or false.
True
Rights of accumulation allow an investor to combine previous investments in the fund with today's investment to determine today's sale charge. True or false
True
The breakpoint sales level is in place because members and indirectly RR (registered reps) could earn more concession of dollars on a smaller customer investment (with a high sales charge) than a larger customer investment true or false
True
Once an investor accumulates $50K in fund, each additional investment, no matter how small qualifies for the lowest sales charge of 2% True or false
True because of rights of accumulation
The customer may qualify for reduced charges (regarding rights of accumulation) when the total value of shares previously bought and shares currently being bought are ABOVE a certain dollar amount. True or false.
True.
The initial fund investor's acct value fluctuates proportionately with the mutual fund portfolio's value. True or false.
True.
A customer investing $9k is just short of the $10k breakpoint. In his situation, the customer might sign an LOU promising an amount that will qualify for the breakpoint within 13 months from the date of letter. True or false?
True. An additional $1K within 13 months qualifies the customer for the reduced sales charge
A customer who despite the money to complete the LOI (letter of intent) received the escrowed shares. True or false
True. When doing an LOI, the mutual fund holds the extra shares purchases from the reduced sales charge in escrow.
All fees directly related to the product (annuity) must be disclosed to who?
Variable annuity buyer. These product-specific charged include administrative feeds, investment advisory feeds, and custodial feeds.
What are no-load shares?
When the fund does not charge any type of sales charge and the shares are purchased at NAV. No load funds are permitted to charge fees that are not considered sale charges such as PURCHASES FEES ACCOUNT FEES EXCHANGE FEES AND REDEMPTION FEES
Class A (front end load) shares are
When the sales charge is taken from the total amount invested. Front end loads are the most common way of paying for mutual fund shares
Suppose a mutual fund's shares are priced at $12.34 per share and the investor wishes to invest $4,000. Given the share price and the amount the investor wants to invest, the purchase will be for how many shares?
Will be for 324.15 shares 4,000 / 12.34 = 324.15 The investor just needs to decide on how much $ she wants to invest instead of how many shares she wants to own
Does a mutual fund's capital shrink when an investor redeems shares?
Yes and so does the number of outstanding shares, but the value of each share does not fall as a result of the redemption.
Combination Privilege aka Family of Funds
allows investors to combine purchases of many funds within the mutual fund family to reach a breakpoint/reduced sales charge.
escrow account
an account where money is held in trust until it can be delivered to a designated party
Statement of Additional Information (SAI)
detailed registration document for an open-end or closed-end management company providing further details than what is contained in the statutory prospectus. This is NOT required for sale. If requested, must be delivered with 3 business days.
Summary Prospectus
is the disclosure document provided to investors by mutual fund companies PRIOR to or at the time of sale. It is the mini version of the Final Mutual Fund Prospectus. Relevant tax information and broker compensation are also included in the disclosure document. Customer must be able to access the statutory prospectus online.
Forward Pricing
pricing method used by mutual funds based on the next price to be computed
