6.3 Financial Goals/Objectives
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: A) made an unsuitable recommendation, since a municipal revenue bond would have been more appropriate. B) made an unsuitable recommendation based on the client's needs and objectives. C) recommended a suitable investment because GOs are good long-term investments. D) committed no violation because municipal bonds are well suited for the market's volatility.
Answer: B In recommending a conservative, tax-exempt investment to this customer, the investment adviser representative has failed to make a suitable recommendation given the client's objectives. Municipal bonds are better suited for individuals in high tax brackets and offer little upside appreciation potential.
A broker/dealer's recommendations must be suitable for a customer and based on an individual's: investment objectives. financial background. tax status. A) I and II. B) II and III. C) I, II and III. D) I only.
Answer: C A broker/dealer should take into account a customer's financial status, tax bracket, and investment objectives when recommending a security.
When making recommendations to an advisory client, which of the following carry the most weight? The client's risk tolerance. Past performance of the adviser representative's recommendations. The client's investment needs and objectives. The client's previous investment experience with other advisers. A) II and III. B) II and IV. C) I and III. D) I and IV.
Answer: C Investment objectives and risk tolerance should determine recommendations to an individual advisory client.
Which of the following mutual funds should an investment adviser representative recommend to a corporate client whose objective is current income with moderate risk? A) Preferred stock fund. B) Aggressive growth fund. C) Money market fund. D) High-yield bond fund.
A) Preferred stock fund. Answer: A Preferred stock generates current income in the form of dividends. Aggressive growth funds strive for capital appreciation rather than current income. Money market funds have low yields, not the high yields that an income investor wants. While high-yield bonds provide current income, they entail a high, rather than a moderate, degree of risk.
A new client inherits $25,000 and wishes to use the money to purchase an 8% municipal general obligation bond selling at an 8.45% yield. The $1 million bond issue, due in 15 years, is rated Baa. All of the following factors would result in your recommending against such a purchase EXCEPT: A) the client's job is not secure. B) the client is willing to accept a moderate amount of risk. C) the client is in the 18% tax bracket. D) this would be the client's only investment.
Answer: B) the client is willing to accept a moderate amount of risk. *A Baa rating (the lowest investment grade) is consistent with the client's willingness to accept moderate risk which would not be a reason to recommend against this purchase. The client's 18% tax bracket is too low to take full advantage of the bond's tax-exempt feature. This client might be better served by buying similar quality corporate bonds. The bonds would not be very liquid (because only 1,000 bonds were issued). it is only appropriate for a portion of a client's investments to be illiquid depending upon their situation.
An investor diversifying a corporate bond portfolio does NOT consider: A) domicile of the investor. B) issuer. C) quality. D) maturity.
Answer: A Domicile, or geographic location of the investor, is not relevant in diversifying a corporate bond portfolio. For example, it is irrelevant if GM the client is located in Michigan or New Jersey. This could be a factor for municipal bond investors due to the possibility of avoiding state income tax. A corporate bond portfolio can be diversified by issuer, quality (rating), domicile of the issuer and maturity.
