SERIES 65 CHAPTER 17 PART 1
Rendering investment advice requires knowing certain information about your client. Which of these would be the least reliable source of that information?
Client's Facebook page
Which of the following is a factor that must be considered when constructing a portfolio?
Client's risk tolerance
An investment adviser cannot adequately advise a client without knowing the client's financial status. When determining that status, it is important to differentiate between financial and nonfinancial considerations. Which of the following would be considered a financial consideration rather than a nonfinancial one?
Client's stamp collection
Which of the following is generally not an appropriate product for retirement planning?
Commodities
Which of the following is the least significant consideration in making an investment recommendation to a client?
Education
For which of the following business entities would suitability be based on the objectives of all the owners on a collective basis?
General partnership
Which of the following would be most suitable for a young couple investing the assets of their IRAs?
Growth mutual funds
An investment adviser representative's client lost her father to lung cancer. Among the assets bequeathed to her were 2,000 shares of a tobacco stock. Which of the following is most likely not a consideration when recommending to her what to do with the stock?
Her father's years of investment experience
An elderly widow with no independent income wishes to invest the proceeds from her recently deceased husband's life insurance. Which of the following would be the most suitable recommendation?
High-grade corporate bond mutual fund
A customer who seeks to supplement his retirement income and has a high risk tolerance would find which of the following securities most suitable?
High-yield bond funds
For a trust account not seeking appreciation, which of the following would be recommended?
Highly rated, fixed-income securities
Any recommendations made to customers by a broker-dealer must be suitable for the customer on the basis of an investigation of the customer's I. investment objectives II. financial status III. ability to pay high commissions IV. desirability as a customer
I and II
Your retired 72-year-old client still lives in the home he purchased 35 years ago for $40,000. It is currently valued at $700,000 and there is no mortgage. The client has almost $500,000 in his self-directed IRA rollover account. When determining suitable investments for this client, you would base your recommendations on the fact that I. the client is an accredited investor having a net worth in excess of $1 million II. a home equity loan could more than double the amount of funds available to invest III. as a retiree, any losses suffered cannot be made up from current income IV. the client's time horizon could be as long as 20 years
III and IV
If a widow with no outside source of income and moderate financial resources asked you for investment advice, the most appropriate recommendation(s) would be new issues of common stocks growth stocks speculative issues income securities
IV only
One of your prospective clients is considered a key employee at his place of business. This individual has a net worth of almost $3 million, currently earns in excess of $540,000 per year, and is married with two teenage children. He currently has a little over $1 million in his 401(k), slightly more than half of which is invested in his employer's common stock. The company is the beneficiary of a $1.5 million key person life insurance policy on his life. Given these facts, what is your greatest concern as his adviser?
Inadequate life insurance coverage
A client is interested in investing in a mutual fund that will provide current income without the risk of large swings in the portfolio's value. The client is in a high-income tax bracket and has a moderate risk tolerance. Which of the following funds is most appropriate for this client?
Intermediate-term municipal bond fund
What would be the time horizon for a 65-year-old client who has just retired?
It depends on the individual's life expectancy.
A couple in their early 30s has been married for 4 years, their disposable income is relatively high, and they are planning to buy a condominium. If they need a safe place to invest their down payment for about 6 months, which of the following mutual funds is the most suitable for these customers?
LMN Cash Reserves Money Market Fund
An investor is in a low tax bracket and wishes to invest a moderate sum in an investment that will provide some protection from inflation. Which of the following should you recommend?
Mid-cap common stock mutual fund
A married couple in their early 50s saving for retirement would most likely have which of the following objectives?
Moderate risk, moderate safety, low liquidity
An IAR has set up the initial meeting with a prospective advisory client. An important part of that meeting is gathering client data. Of the following items, which is generally considered to be the most important for preparing suitable recommendations?
Risk tolerance
Construction of an investment policy statement (IPS) requires identifying the client's objectives and constraints. Which of the following would not be in the list of constraints?
Risk tolerance
Which of the following is least likely to be considered an investment constraint when preparing an investment policy statement?
Risk tolerance
A man divorces his spouse after 10 years of marriage and remarries. If the man is the sole provider, what part of the worker's Social Security benefits is the new spouse entitled to?
She is entitled to the same Social Security benefits as the ex-spouse.
Which of the following items would be found on a family balance sheet?
Spouse's engagement ring
An individual with $100,000 to invest will require these funds in 6 months for the purchase of a house. In which of the following circumstances did the agent act correctLY?
The agent convinced the client to invest in a Treasury bill on the basis of its safety.
What is among the most important nonfinancial considerations in determining the suitability of investments for a client?
Tolerance for risk
Which of the following is not a standard used to determine whether a particular mutual fund is suitable for an individual investor?
Whether the investment is made directly through the fund itself or through a broker-dealer
Your client is 75 years old and has $100,000 to invest. He enjoys a relatively high income and is not concerned with immediate liquidity, although he is risk averse. The most suitable asset allocation strategies listed below would be
a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund
An investment adviser representative is preparing a financial plan for a new client. As part of the data collection process, the IAR needs to collect the relevant information to analyze the client's cash flow. Included in the cash flow statement would be all of the following except
assets
An investment adviser representative (IAR) prepares a comprehensive financial plan for a new client. Part of the plan includes detailed portfolio recommendations. Seeing a negative reaction from the client, it becomes obvious to the IAR that he is dealing with an ignorant person who is filled with many market misconceptions. It would be reasonable for the IAR to
attempt to educate the client to correct those misconceptions, but leave the final decision up to the client
When preparing a client profile, the least important concern would be:
educational background.
One of your new clients has only been working for 3 years but is already interested in retirement planning. In order to be fully eligible for Social Security, the client must
have a minimum of 40 covered quarters of employment.
The tendency of people to follow the actions of a larger group when making financial decisions, whether those actions are rational or not, is known as
herd mentality
In general, the first step an investment adviser should take with a new client is
information gathering.
An investor concerned about preservation of capital would be most apt to purchase
investment-grade corporate bonds
A private foundation is required by statute to pay out a minimum percentage of its asset value each year as qualifying distributions. This investment constraint is best classified as
legal and regulatory.
When interviewing a new client, the discussion leads to the damage done to the environment by oil spills. The client mentions the names of some large petroleum companies and says that she does not want stocks like that in her portfolio. In so doing, she is expressing
nonfinancial consideration; her values.
Among the options available to replace the lost income of an employed individual who becomes unable to work due to a disability would be any of these except
proceeds of a life insurance policy
In projecting future cash requirements, one of the tools is a capital needs analysis. When doing one, all of the following would be considered capital needs except
rolling over a 401(k) into an IRA
All of the following statements regarding a client's attitudes, beliefs, and values are correct except
the IAR should pay little attention to a client's attitudes, beliefs, and values during the information gathering process.
An investment adviser would be least likely to gather financial planning information about a client from
the client's Tweets.
One of the tasks of an investment adviser representative is gathering information to complete a client financial profile. Among the sources of this information would be all of the following except
the client's social media accounts.
An individual's net worth is
the difference between the individual's assets and the individual's liabilities
In order for an individual to receive Social Security benefits based on the earnings of the ex-spouse, the couple must have been married for at least
10 years.
Which of the following would be the most appropriate portfolio mix for an aggressive investor?
10% cash equivalents, 20% bonds, and 70% stocks
Your 30-year-old client has $100,000 to invest and willing to assume a moderate amount of risk, but she would also like to have $10,000 available for a down payment on a home in 6 months. Which of the following asset allocation strategies would best suit her situation?
70% large-cap stock fund, 20% balanced fund, 10% money market fund
Clients should be aware of the potential effects of volatility on their portfolios. Which of the following would most likely have the lowest volatility?
A money market fund
Myla is retiring in two years and will need income. Which of the following mutual fund types would most likely be the least desirable for her?
A special situation fund
A client is risk averse and is planning on retiring in 16 years. The client is rolling over $100,000 from his 401(k) plan, all of which is currently invested in his former employer's stock. As the client's investment adviser, which of the following would you recommend?
AAA-rated zero-coupon bonds maturing in 16 years
Several investors open an account in joint tenancy. Financial information is required on which of the following investors?
All the investors
A client is risk averse and is planning on retiring in 16 years. As the client's investment adviser, which of the following would you recommend?
50% in an S&P 500 index fund; 50% in a portfolio of high-quality bonds
From the standpoint of diversification, which of the following would be considered the most conservative?
A balanced fund
Which of the following will most likely be the most volatile investment over a short-term period?
A growth-oriented common stock fund
Which of the following funds would you recommend to a moderate-risk client seeking long-term capital gains who also values professional stock selection?
A large-cap growth fund
Tammy has a strong feeling about a particular investment's future performance. She is constantly seeking information to validate her belief that this investment will greatly appreciate. However, she is dismissing any information which is contradictory to this stance. This is an example of which of the following?
Confirmation bias
When making recommendations to an advisory client, which of the following carry the most weight? I. The client's risk tolerance II. Past performance of the adviser representative's recommendations III. The client's investment needs and objectives IV. The client's previous investment experience with other advisers
I and III
Of the following stocks, which would be the most suitable for a conservative, risk-averse investor?
Large-cap consumer goods company
Parker and Mary have recently divorced. For Mary to receive Social Security benefits based on Parker's earnings, which of the following conditions must exist?
The marriage must have lasted at least 10 years.
An individual investor specifies to her investment adviser representative that her portfolio must produce a minimum amount of cash each year. This would be considered
a liquidity constraint.
Your client asks for a recommendation for her emergency fund. You would most likely suggest
a money market mutual fund because of its high degree of liquidity
An investor who purchases stock in two technology companies with high projected earnings and growth potential but little performance history is considered
an aggressive investor
A client with 25 years until retirement should invest primarily in
common stocks
Years ago, following your advice, a client opened a 529 Plan to save for their son's college education. The child is now about 3 years from beginning his freshman year. The client, believing that the stock market is currently undervalued, wishes to reallocate the plan assets so that most of the funds are in a broad stock market index portfolio. At this time, your advice would probably be against this allocation because of
market risk
Insurance agents frequently use a capital needs analysis to help determine the correct amount of life insurance needed by their clients. That analysis would look at all of these except
market volatility
An investment adviser representative meets with a couple who explains that they wish to be able to pay for their daughter's college education. The IAR is told that the child will be starting school in 5 years. This 5-year time period would be considered
an investment constraint
When making a customer profile, one of the documents created is a family balance sheet. Among other items, your client's balance sheet would include
assets.
Carol is opening an investment account with her agent and will be expected to disclose all the following items of financial or personal information except
educational background
Pat Conway, a risk-averse investor, has never invested money outside of bank instruments. Recognizing Pat's conservative nature, his agent recommends Treasury notes, pointing out that federal government-backed securities are riskless securities. In the above situation, the agent has acted
improperly, because the agent failed to disclose that the customer retains interest rate risk
A client who states that she wants to avoid petroleum company stocks is expressing a
non-financial consideration
As part of its suitability determination, an IA firm requires that all potential nonbusiness clients complete a family balance sheet. Items that would be included are I. gold jewelry II. loan secured by the family automobile III. the amount paid thus far this year for Botox injections IV. the balance owed to the dentist for new crowns
I, II and IV
An investor purchases zero-coupon bonds issued by the U.S. Treasury due to mature in 18 years at $100,000. Which of the following might describe the primary reason for selecting that investment vehicle? I. The investor is 65 years old and needs the reliability of current income. II. The investor is 45 years old and has purchased these in an IRA rollover account and wants the assurance of funds for retirement. III. The investor is 30 years old and has a newborn child and wishes to assure funds for a college education. IV. The investor is 20 years old, has just received an inheritance, and wishes to shelter income for as long as possible.
II and III
Which of the following should be considered by an investment adviser in determining whether a specific investment is suitable for an individual investor? I. The past performance of the investment II. The investor's anticipated time horizon III. The amount of remuneration to the broker-dealer and to the agent IV. The level of the investor's acceptance of risk and volatility
II and IV
Your firm's market analyst believes the current bullish market in equities will continue. Which of the following would be most suitable for a growth-oriented investor?
Large-cap stock fund
Tamika is an investment adviser representative with Financial Engineers, LLC, a covered investment adviser. The firm uses an investment policy statement to help design financial plans for their clients. One of Tamika's current clients plans to purchase a new boat 7 months from now. When using the IPS, this would be considered
an investment constraint
Financial planners frequently assist their clients with budgeting. One can't really prepare a budget without knowing the family's cash flow. In preparing a family cash flow statement, all of the following items would appear except
assets
A 27-year-old client is in the lowest tax bracket and seeks an aggressive long-term growth investment. If his investment adviser representative recommends a high-rated general obligation municipal bond, the IAR has
made an unsuitable recommendation based on the client's needs and objectives
An investment advisory firm requires all new clients to complete a 4-page questionnaire before conducting the first meeting. This would be known as
the information-gathering stage.
It would be correct to state that when an investor has a shorter time horizon,
the need for liquidity is more important
Which of the following are nonfinancial considerations that need to be factored into a client's investment profile and recommendations? I. Sources of income. II. Age of dependent children. III. Real estate holdings. IV. Investment experience.
II and IV.
Many financial planners recommend that clients wait until age 70 to begin their Social Security retirement benefits. The primary reason for this recommendation is that
by waiting past full retirement age (66 in our example), your payments will grow at an annual rate of 8%
One problem facing agent and client alike is determining how much life insurance is necessary to meet future needs. One tool that is useful for making that determination is
a life insurance capital needs analysis
A client profile is not complete without a family income statement. A typical one would include I. dividends II. credit card debt III. autos IV. mortgage interest
I and IV
In administering a joint account, a member firm's responsibilities concerning suitability determination and information disclosure apply to
all persons who jointly own the account.
A newlywed couple in their 20s with a combined annual income of $46,000 recently opened individual IRA accounts with you and deposited $100 into each to get the accounts started. One month later, you receive a call from them telling you they have received a six-figure inheritance and are now able to fully fund those IRAs. The most suitable recommendation for the couple is to
invest $6,500 into a stock index fund in each IRA account and place the remaining funds in a money market account until their new financial situation can be evaluated.
Which of the following would be appropriate actions when using a model portfolio for a client? I. Gather information from the client to establish his risk tolerance, time horizon, and investment expectations. II. Select a portfolio mix that is appropriate for the client based upon his risk tolerance, time horizon, and investment expectations. III. Place the client's assets into the model portfolio regardless of his comfort level with your recommendation. IV. Periodically review the portfolio to determine if any changes or modifications are necessary.
I, II, and IV
A new client wants your recommendation on available investment options. You prepare a client profile, which reveals that the investor is 66 years of age, has a low risk tolerance, and is in a low tax bracket. The investor's primary objectives are safety and income. Of the following, the most suitable choice would be
insured bank certificates of deposit
If a client wanted an investment that would eliminate interest risk as to principal, you would recommend
a bank-insured certificate of deposit
