Series 66 Chapter 19

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? A) LMN Cash Reserves Money Market Fund B) XYZ Investment-Grade Bond Fund C) ABC Growth & Income Fund D) ATF Capital Appreciation Fund

A

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? A) Client's stamp collection B) Fact that both parents were smokers who died of lung cancer C) Client's marital status D) Client's membership in Greenpeace

A

An investment adviser has a client who wants to save for college for her child. The child will be entering college in 5 years. This would be an example of A) an investment constraint B) a capital need C) tactical asset allocation D) planning too late

A

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 A) an investment constraint B) an investment policy statement (IPS) C) the present value needed D) a capital need

A

An investment adviser would be least likely to gather information about a new client A) from social media. B) on a smartphone app. C) during a face-to face interview. D) by using a questionnaire.

A

Your married customers are both 42 years old, have 2 children ages 14 and 12, and have spent the past 10 years accumulating money to provide for their children's education. Their oldest child will enter college in 4 years, and the customers are very cautious investors. If they need a safe investment that provides regular income to help them meet tuition payments, which of the following mutual funds is the most suitable for these customers? A) LMN Investment-Grade Bond Fund B) RST Balanced Fund C) ABC Stock Index Fund D) ATF Overseas Opportunities Fund

A

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) A large-cap growth fund B) A small-cap growth fund C) An international index fund D) S&P 500 Index fund

A A large-cap growth fund is the most appropriate choice for a moderate-risk client because large capitalization stocks are generally less volatile than small-cap stocks and provide long-term capital growth. This is a more appropriate choice than the index fund because there is no stock selection there, only investing to parallel the index.

A business organized as a sole proprietorship wishes to open an advisory account. When preparing an investment policy statement, the IA would have to consider the objectives of A) the sole proprietor B) the partners C) the stockholders D) the members

A A sole proprietorship only has one owner. Therefore, the account would focus on the needs of that individual.

An individual has just received a bonus of $12,473 and wishes to generate some income without risking loss of capital. Assuming the client is in a low tax bracket, which of the following would be the most suitable choice? A) Bank-insured CDs B) Insured municipal bonds C) Growth stocks D) Public utility stocks

A The only choice here with no risk to capital is the bank-insured CD. Although the insured municipal bond is guaranteed to repay principal at maturity, the bond will still be subject to interest rate risk and, with the client in a low tax bracket, municipal bonds are generally unsuitable investments.

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? A) Confirmation bias B) Anchoring effect C) Prospect theory D) Herd theory

A This scenario is an example of the confirmation bias which states that investors tend to look for information that supports their previously-established decisions and beliefs. Herd theory, or "following the herd", is when an investor jumps on the bandwagon following the lead of others. The anchoring effect is when you base your decisions on initial information received and find it difficult to move away from that decision.

Mary Huggins is the ex-wife of Charlie Huggins. They were married for 12 years and then finalized a divorce. Charlie is now 70 and has begun taking his Social Security benefits. Mary remarried last year. It would be correct to state that A) Mary is not entitled to any of Charlie's Social Security benefit. B) Mary is entitled to full spousal benefits because they were married for at least 10 years. C) Mary is entitled to Charlie's Social Security benefits only when she reaches full retirement age. D) Mary is entitled to Charlie's Social Security benefits or those of her new husband, whichever is the greater.

A When a couple has been married for at least 10 years, the ex-spouse is entitled to full spousal Social Security benefits unless remarried. By remarrying, Mary no longer has any claim on Charlie's Social Security benefits.

Which of the following items would be found on a family balance sheet? A) Annual salary B) Spouse's engagement ring C) Income taxes paid D) Dividends and interest received

B

Which of the following situations would most likely cause an individual's application for a disability income insurance policy to be denied? A) BMI over 26 B) Working in a hazardous occupation C) Being over 50 years of age D) Type 2 diabetes

B

Which of the following would be most suitable for a young couple investing the assets of their IRAs? A) Oil and gas exploration programs B) Growth mutual funds C) Call options on large-cap stocks D) Penny stocks

B

A 50-year-old client with modest means wants to construct an investment program. He has no investment experience, his major consideration is saving for retirement, and he has limited risk tolerance. Which of the following would you recommend? A) High-grade bond fund B) Growth and income mutual funds C) Aggressive growth mutual funds D) Call options on the S&P 500 Index

B

A benefit of waiting until the age of 70 to claim Social Security benefits is that A) a higher percentage of the monthly benefit is exempt from income taxes. B) benefits are increased by 8% for each year from the full retirement age. C) Medicare benefits are increased. D) the income tax rate is reduced once the claimant reaches 70.

B

An investment adviser using an insurance approach to capital needs analysis would A) select securities based upon the customer's investment experience B) determine the insurance coverage needed to complete the customer's financial objective should the customer die before the objective is met C) only invest in securities guaranteed by the FDIC D) invest exclusively in insured securities such as insured municipal bonds or Ginnie Maes

B

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? A) Municipal unit investment trust B) Mid-cap common stock mutual fund C) Money market mutual fund D) Ginnie Mae fund

B

Many investment advisers prepare an investment policy statement (IPS) when counseling their clients. Which of the following should least likely be included as a constraint in an investment policy statement? A) Asset classes the client specifically forbids or limits based on past experience B) How the funds are spent after being withdrawn from the portfolio C) Any unique needs or preferences an investor may have D) Constraints put on investment activities by regulatory agencies

B

One of your clients has a tendency to follow the actions of a larger group of people when making financial decisions, whether those actions are rational or not. The client's behavior is an example of A) confirmation bias. B) herd mentality. C) overconfidence. D) anchoring.

B

What is among the most important nonfinancial considerations in determining the suitability of investments for a client? A) Assets under management B) Tolerance for risk C) Rate of interest on Treasury bills D) Client's income needs

B

Which of the following items is NOT necessary to establish before helping a client open an investment account? A) Emergency fund B) Zero balance on all credit cards C) Established short- and long-term investment goals D) Adequate life insurance

B Although credit card debt may carry a high interest rate, no investment plan should be started without an emergency fund, adequate life insurance, and a set of goals. In fact, it is possible that the client is carrying the balance because of a very low promotional rate.

A customer who seeks to supplement his retirement income and has a high risk tolerance would find which of the following securities most suitable? A) Municipal GOs B) High-yield bond funds C) Treasury receipts D) Investment-grade bond funds

B High-yield bonds yield more than investment-grade bonds. Because the client has a high risk tolerance, these bonds are more appropriate than investment-grade bonds that yield less.

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? A) Municipal bonds B) High-grade corporate bond mutual fund C) Call options D) Oil and gas exploration program that you know is going to strike

B This customer needs income. Of the answers provided, the bond fund would be the most suitable because it would provide income while maintaining relative safety. While the municipal bonds are probably safer, the benefits of their tax-free income would probably be lost on a client with no independent income.

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? A) The new spouse is entitled to splitting the benefits with the ex-spouse. B) She is entitled to the same Social Security benefits as the ex-spouse. C) She will be entitled to the same Social Security benefits as the ex-spouse after 10 years of marriage. D) The new spouse is entitled to more benefits than the ex-spouse.

B When an individual remarries, the new spouse is entitled to full Social Security benefits. As long as the previous marriage lasted at least 10 years, that ex-spouse (if not remarried) is also entitled to full benefits. That means it is possible for 2 people to receive full benefits at the same time.

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 A) liquidity. B) time horizon. C) legal and regulatory. D) unique circumstances.

C

A client has a more-than-average aversion to risk with a primary investment objective of capital preservation. Given the following choices of portfolio allocations, which would probably be the most suitable for this investor? A) A preponderance of speculative stocks and high-yield bonds B) A mix of high-yield bonds and cash/cash equivalents C) A mix of investment-grade bonds and cash/cash equivalents D) A preponderance of growth stocks and limited partnership vehicles

C

All of the following statements regarding a client's attitudes, beliefs, and values are correct except A) values are attitudes and beliefs for which the client feels strongly. B) the client's attitudes reflect the client's opinions, values, and wants. C) the IAR should pay little attention to a client's attitudes, beliefs, and values during the information gathering process. D) beliefs are a type of attitude because they reveal the client's understanding of some aspect of his life.

C

An investor concerned about preservation of capital would be most apt to purchase A) call options B) common stock C) investment-grade corporate bonds D) warrants

C

An investor has just received an inheritance of $100,000 and has decided to use the money to buy a new home. Because it will take time to decide where to buy, it is expected that the purchase will not be made for another 6-9 months. If this investor placed the money into a broad market index ETF, the primary risk taken would be A) interest rate risk B) business risk C) market risk D) unsystematic risk

C

Caroline considers her investment skills to be much greater than they actually are. She takes credit for many decisions that have positive results but blames the economy when her investments do poorly. Caroline's behavior is an example of A) confirmation bias. B) anchoring. C) overconfidence. D) regret aversion.

C

If ABC Fund pays regular dividends, offers a high degree of safety of principal, and appeals especially to investors seeking tax advantages, ABC is A) a money market fund B) an aggressive growth fund C) a municipal bond fund D) a corporate bond fund

C

If a 65-year-old woman of substantial means is seeking income and preservation of capital, which of the following should you recommend? A) Large-cap fund, small-cap fund, government bond fund B) Aggressive growth fund, mid-cap fund, growth and income fund C) Government bond fund, corporate bond fund, municipal bond fund D) Small-cap fund, mid-cap fund, government bond fund

C

If a client wanted an investment that would eliminate interest risk as to principal, you would recommend A) a 91-day Treasury bill B) TIPS C) a bank-insured certificate of deposit D) preferred stock

C

If an investor has $20,000 to invest, but requires $500 per month to pay for her mother's nursing home care, which of the following funds should you recommend? A) Biotechnology B) Aggressive growth C) Money market D) Foreign stock

C

It would be CORRECT to state that when an investor has a shorter time horizon, A) the exposure to inflation risk is increased B) the greater the duration C) the need for liquidity is more important D) the risk level is raised

C

John and his sister, Alice, open a margin account as JTWROS. John contributes $50,000, and Alice contributes $25,000. They have agreed that Alice will trade the account, and they will share in the profits and losses equally. As their agent, you would gather information regarding suitability for A) either, because in a JTWROS account the owners share equally B) John, because he has made the larger contribution C) both, because information regarding all owners is relevant D) Alice, because she will be trading the account

C

Liquidity risk is the risk that when an investor wishes to dispose of an investment, no one will be willing to buy it, or that a very large purchase or sale would not be possible at the current price. With that in mind, which of the following would likely have the lowest degree of exposure to liquidity risk? A) RELPs B) Investment-grade municipal bonds​ C) Money market mutual funds D) REITs

C

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) a mortality table B) a statement of beneficiary needs C) a life insurance capital needs analysis D) a premium purchase analysis

C

When developing a client profile, it is important to note both the financial and nonfinancial considerations. These can be categorized as those that are objective and those that are subjective. Included in the list of subjective considerations would be A) balance on the home mortgage B) cash value of life insurance C) risk tolerance D) the family balance sheet

C

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 A) nonfinancial consideration; her knowledge. B) financial consideration; she already has enough money. C) nonfinancial consideration; her values. D) financial consideration; those companies don't pay dividends.

C

When it comes to creating a client profile, the information obtained is divided into 2 basic categories: objective and subjective. Which of the following is considered to be subjective information? A) Salary B) IRA value C) Attitude D) Net worth

C

Which of the following is a factor that must be considered when constructing a portfolio? A) Performance measurement B) Category of investment service required C) Client's risk tolerance D) Verification of the client's identity

C

Your customer, age 60, is retired and living at home with a fully paid-off mortgage. Her portfolio contains growth stocks and high-quality bonds, and she is a longtime investor and comfortable with moderate risk. Her objective is a moderate level of current income to supplement her corporate pension plan distributions and the earnings from her IRA. Which of the following mutual funds is the most suitable for this customer? A) LMN Stock Index Fund B) QRS Capital Appreciation Fund C) ABC Equity Income Fund D) XYZ Biotechnology Fund

C

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? A) GNMA fund B) Preferred stock fund C) Large-cap stock fund D) Bond fund

C

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? A) A government bond fund B) A high-yield bond fund C) 50% in an S&P 500 index fund; 50% in a portfolio of high-quality bonds D) A diversified open-end investment company concentrating in small-cap stocks

C Even though the government bond fund carries less market risk, with a 16-year retirement goal, some inflation protection is necessary. The index fund carries some market risk, but does offer purchasing power protection. The 50/50 mix would seem to be most appropriate.

A 69-year-old client of yours indicates that she is interested in changing the portfolio mix of her IRA. She wishes to sell most of the bonds in the account and replace them with 3x leveraged ETFs. You would probably infer from this that the client A) is risk averse. B) has recently retired. C) is preparing for her minimum required distributions. D) has insufficient retirement savings.

D

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 A) large-cap common stock B) a growth and income mutual fund C) a municipal bond mutual fund investing solely in AAA- and AA-rated bonds D) insured bank certificates of deposit

D

An investment adviser should develop an investment policy based on the needs and objectives of the client. When the client is a business entity structured as a general partnership, the investment policy would have to consider A) the mean requirement of the wealthiest and the poorest partner B) the liability of the general partner C) the number of limited partners D) the objectives of all the partners on a collective basis

D

An investor who purchases stock in two technology companies with high projected earnings and growth potential but little performance history is considered A) a passive investor B) a conservative investor C) a defensive investor D) an aggressive investor

D

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? A) Liquidity B) Time horizon C) Taxes D) Risk tolerance

D

For a trust account not seeking appreciation, which of the following would be recommended? A) Common stock, preferred stock, and debentures B) Common stock in small, highly profitable companies C) Large-cap common and preferred stocks D) Highly rated, fixed-income securities

D

From your meetings with Avery, you realize there is a tendency to follow the actions of a larger group of people when making financial decisions. It makes no difference if those actions are rational or not. Choose the behavioral finance theory that explains Avery's behavior. A) Confirmation bias B) Overconfidence C) Anchoring D) Herding

D

If a customer's chief concern is to shelter as much of his portfolio earnings from tax as possible, which of the following securities would be most suitable? A) High-yield bonds B) Money market instruments C) Treasury receipts D) Municipal GOs

D

What is among the most important nonfinancial considerations in determining the suitability of investments for a client? A) Client's income needs B) Assets under management C) Tolerance for risk D) Rate of interest on Treasury bills

D

What would be the time horizon for a 65-year-old client who has just retired? A) It depends on the individual's insurance company's actuarial tables. B) It depends on the individual's available assets. C) None, because 65 is the age for retirement. D) It depends on the individual's life expectancy.

D

Which economic concept attempts to explain why investors behave irrationally? A) Modern portfolio theory (MPT) B) Efficient market hypothesis (EMH) C) Laffer curve D) Behavioral finance

D

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? A) Highly rated preferred stocks paying liberal dividends B) Laddering U.S. Treasury bills C) Keeping the money in the employer's stock D) AAA-rated zero-coupon bonds maturing in 16 years

D Because the assets are in a rollover IRA, the "phantom" tax on zero-coupon bonds is not an issue here. Being risk averse, the safety of AAA bonds with the guaranteed return of increased principal in 16 years makes this the most appropriate investment. The T-bills will probably not offer as much return and will be subject to continual reinvestment risk. Dividends on preferred stock are not guaranteed, even with a highly rated company, and the current tax advantage offered to dividends is wasted in an IRA. Most would agree that the worst option would be to keep the money in one single stock.

A customer within 1 year of retirement informs his agent that he wants to use the equity in his house to make enough money within the year to fully fund his retirement. According to the Uniform Securities Act, the agent should A) invest the money in high-tech securities because of their unlimited potential B) invest in an ultraconservative portfolio of municipal bonds C) construct a growth-oriented portfolio D) urge the customer to reconsider his investment strategy

D Making unsuitable recommendations to customers is prohibited, and this investor's time frame is unrealistic because the customer cannot meet his objectives in the time allotted. Investment in high-tech securities is unsuitable. Advising the customer to invest in an ultraconservative portfolio of municipal bonds will not meet the customer's objective of capital growth. The agent should advise the customer to reconsider his investment objectives.

A new client indicates a desire to avoid investing in mid-cap stocks because of large losses suffered several years ago. What type of consideration would this be? A) Systematic B) Financial C) Unsystematic D) Nonfinancial

D There are 2 basic investment considerations, financial and nonfinancial. The former deals largely with quantifiable items and the latter with attic attitudinal ones. Wanting to avoid a certain type of asset is generally considered to be attitudinal. The fact that the mid-cap stocks lost money is probably a systematic risk, but that isn't what the question is asking.

The Jones family has scheduled an initial visit with a financial planner. Mr. Jones has an annual salary of $70,000, and this is their first attempt at financial planning. Which of the following should be the first step taken by the financial planner? A) Set goals and dates for reaching them B) Pay off credit card debt C) Determine a reasonable fee for designing the plan D) Establish an emergency fund

D There are many questions on the exam where you will be forced to choose between two possible answers, only one of which is correct. In many cases, it is strictly a matter of opinion, but only NASAA's opinion counts. This is one of them. Goal setting is important, but the regulators feel that the first step in any plan is making sure that there is a "rainy day" fund. We can argue about that because some will say that a good plan can be used to establish that fund where none has existed before. But, please go with the right choice.

Which of the following statements about investment constraints is least accurate? A) Unwillingness to invest in tobacco stocks is a constraint. B) Being an accredited investor increases investment opportunities. C) Diversification efforts can increase tax liability. D) Investors with short time horizons are not likely to worry about liquidity.

D Investors with a time horizon constraint may have little time for capital appreciation before they need the money. The need for money in the near term is a liquidity constraint. Time horizon and liquidity constraints often go hand-in-hand. Diversification often requires the sale of an investment and the purchase of another. Those transactions may trigger tax liability. Attitudes are unique to the client and one of those could be an aversion to certain "sin" products. As an accredited investor, the law permits one to participate in many offerings not available to others.

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 investment objectives financial status ability to pay high commissions desirability as a customer

1, 2

Which of the following investment strategies would be appropriate for an advisory client with a 20-year time horizon before retirement? Holding more stock Holding less cash Holding fewer bonds

1, 2, 3

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 based on the client's needs and objectives B) committed no violation because municipal bonds are well suited for the market's volatility C) recommended a suitable investment because GOs are good long-term investments D) made an unsuitable recommendation, because a municipal revenue bond would have been more appropriate

A

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 A) market volatility B) life expectancy C) the inflation rate D) future earnings

A

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? A) The marriage must have lasted at least 10 years. B) Mary must have worked at least 40 quarters to be eligible for benefits. C) Parker must not be remarried. D) Parker must already be at full retirement age.

A

Rendering investment advice requires knowing certain information about your client. Which of these would be the least reliable source of that information? A) Client's Facebook page B) Face-to-face meeting with the client C) Client's income tax returns D) Your firm's confidential planning questionnaire

A

Tactical Evaluation and Research (TEAR), a federal covered investment adviser, suggests the purchase of stock in a major tobacco company. The client explains that he doesn't want to invest in tobacco stocks because his father passed away from lung cancer. What kind of reason is this? A) Values B) Geographic C) Economic D) Environmental

A

The study of why people often make decisions using rules of thumb rather than rational analysis, basing those decisions on factors economists traditionally don't consider, such as fairness, past events, and aversion to loss, is known as A) behavioral finance B) irrational finance C) systematic risk D) risk tolerance

A

It would be correct to state that when an investor has a longer time horizon, A) the need for liquidity is less important B) the risk level is lowered C) the exposure to inflation risk is lessened D) the greater the initial deposit to reach a projected future goal

A When the time horizon is long, there is little need for access to the funds now. Therefore, liquidity is a minor consideration. With a long time horizon, the investor can take greater risks (and should because it will be necessary to combat the higher inflation risk).

Which of the following is NOT a standard used to determine whether a particular mutual fund is suitable for an individual investor? A) Whether the investment is made directly through the fund itself or through a broker-dealer B) Components of an investor's current portfolio C) The amount of time elapsing between the deposit of the investment and the investor's anticipated use of the funds D) The investor's estimated tolerance for risk and volatility

A Whether a mutual fund is offered through the issuer or through broker-dealer channels is not a suitability determinant. However, time horizon, risk tolerance, and existing portfolio components help determine investment suitability.

Several investors open an account in joint tenancy. Financial information is required on which of the following investors? A) Only the one authorized to trade the account B) The majority of the investors C) The largest investor only D) All the investors

D

An adviser always inquires into her clients' investment objectives, financial situations, and needs. The investment adviser is A) determining whether she has any inherent conflicts of interest with her clients B) obtaining the information required to fulfill her professional obligation regarding suitability C) violating her ethical obligation regarding confidentiality of client information D) giving herself an unethical advantage regarding how much the client can afford to spend on an advisory fee

B

Which of the following is a factor that must be considered when constructing a portfolio? A) Performance measurement B) Client's risk tolerance C) Category of investment service required D) Verification of the client's identity

B

Which of the following is generally NOT an appropriate product for retirement planning? A) Life insurance B) Commodities C) Mutual funds D) Bonds

B

If an investment adviser uses a client questionnaire to determine a client's financial situation, the adviser is A) acting unethically, as client information is confidential B) acting unethically, as this information may be used to determine how large an advisory fee to charge C) acting ethically, as the information is necessary to determine the suitability of recommendations D) acting correctly to determine if a conflict of interest exists

C

In administering a joint account, a member firm's responsibilities concerning suitability determination and information disclosure apply to A) the person whose Social Security number is on the account B) the person with trading authority for the account C) all persons who jointly own the account D) the person with the greatest capital contribution

C

If a customer is in the 15% federal income tax bracket and his main investment objective is current income, which of the following securities should the agent recommend? A) Zero-coupon bond. B) City of Milwaukee GO bond. C) Investment-grade corporate bond. D) U.S. government bond.

C The investor is in a low tax bracket, so the tax-exempt municipal bond is not a suitable investment. To maximize income, the best recommendation is the corporate bond which offers a higher yield than a government bond with a similar maturity.

One of your prospective clients is considered a key employee at his place of business. This individual has a net worth of almost $6 million, currently earns in excess of $500,000 per year, and is married with 2 teenage children. He currently has a little over $1 million in his 401(k), 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? A) Alternative minimum tax B) Inadequate funding for college savings C) Inadequate life insurance coverage D) Too high a percentage of the retirement plan invested in the company's stock

C Because the client's only life insurance seems to be that with the company as beneficiary, it does not appear that he has adequately planned for his premature death and the potential estate taxes.

A retired person seeking to maximize income with reasonable safety and liquidity should most likely consider investing in A) a long-term government bond fund B) an intermediate-term government bond fund C) an intermediate-term, high-grade corporate bond fund D) a large-cap growth fund

C In all of these cases, liquidity should not be a problem because mutual funds have a 7 day redemption requirement. However, interest rate risk increases as the maturities lengthen, so the intermediate-term portfolio offers that benefit, albeit at a slight reduction in income. The high-grade corporate bonds will offer a greater return with slightly more risk than the government bonds. If the question had said the investor wished to minimize risk, then the government bond fund would have been a better selection.

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) a 50% municipal bond fund, 40% money market fund, 10% large-cap common stock fund B) a 50% municipal bond fund, 40% government bond fund, 10% money market fund C) a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund D) a 50% municipal bond fund, 50% large-cap common stock fund

C The allocation of 50% municipal bond fund, 40% government bond fund, and 10% large-cap common stock is appropriate for a high-income person of age 75 who is not concerned with liquidity. The 10% large-cap fund provides some inflation protection with very moderate downside risk.

Which of the following is least likely to be considered an investment constraint when preparing an investment policy statement? A) Liquidity needs B) Legal and regulatory factors C) Risk tolerance D) Tax concerns

C The commonly tested investment constraints are: liquidity needs, time horizon, taxes, legal and regulatory factors, and unique needs and preferences. Risk tolerance is used to help determine what investment objectives will best meet the investor's goals.

An elderly client explains to you that he is risk averse and wishes to find an investment that will provide him with preservation of capital. Which of the following might you recommend? A) An index fund B) Variable annuities C) Long-term U.S. government bonds D) Bank-insured CDs

D

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) a legal and regulatory constraint. B) a tax constraint. C) a unique circumstance. D) a liquidity constraint.

D

An investment adviser is conducting the initial meeting with a new advisory client. Which of the following is least necessary when gathering information necessary to fulfill the engagement? A) Collecting personal financial information B) Inquiring about the number of dependents C) Inquiring about the age or dates of birth of dependents D) Determining which securities to purchase for the client's investment portfolio

D

In general, the first step an investment adviser should take with a new client is A) monitoring the portfolio. B) making suitable recommendations. C) explaining the risks of investing. D) information gathering.

D

Which of the following best describes a global mutual fund? A) The portfolio consists of a global selection of asset classes, including cash equivalents, equities, debt, and tangible assets. B) The portfolio consists of securities of companies domiciled throughout the world, including the United States. C) The investment adviser under contract to the fund uses a team of managers who are located at the various financial capitals around the globe. D) The portfolio consists of securities of companies domiciled throughout the world, excluding the United States.

B

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 A) an investment constraint B) a financial objective C) a capital need D) an investment goal

A Investment constraints are obstacles or restrictions that must be met in order to meet objectives. In this case, we are dealing with a liquidity constraint—in 7 months, cash will be necessary to make the purchase.

Your client often makes irrational financial decisions because she bases her decisions on information that should have no influence on the decision at hand. The client's behavior is known as A) anchoring. B) herd mentality. C) overconfidence. D) confirmation bias.

A Making irrational decisions based on information that should have no influence on the decision at hand is known as anchoring. Herd mentality is the tendency to follow the actions of a larger group, whether rational or not. Confirmation bias is the tendency to pay attention to information that supports one's preconceived opinions while disregarding accurate, unsupportive information. Overconfidence occurs when an investor considers her abilities to be much better than they actually are.

Among investor objectives is preservation of capital. Which of the following would be most appropriate for inclusion in the portfolio of this kind of investor? A) A money market fund B) International funds C) U.S. Treasury bonds D) Blue-chip stocks

A Preservation of capital means no fluctuations. Money market funds are the only logical choice here. True, the Treasury bonds do not have default risk, but because they can have maturities as long as 30 years, they are subject to interest rate risk.

A 74-year-old widower has been your client since his early 50s. He is a well-informed investor and has always seemed capable of understanding most investment concepts you have presented. At least twice a year, the 2 of you meet to evaluate his current financial situation and objectives. In your last meeting, it seemed to you that he was distracted and somewhat forgetful. It would be appropriate for you to do all of the following EXCEPT A) wait to see if there are further causes for concern about his capabilities B) inform your supervisor of your concerns about his memory loss C) ask him to invite a friend or family member to accompany him to appointments with you D) take detailed notes on future conversations and meetings with him

A Taking action in advance could help protect you and your firm should a client subsequently indicate that he does not remember having agreed to a recommendation. Taking detailed notes can help verify what has been discussed in conversations or at meetings. Having others present may help to verify what has been discussed and agreed upon.

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? A) Life stage B) Age of the prospect C) Risk tolerance D) Assets available for investment

C

Pemberton bought a stock share at $50 and wants to earn a profit, so he decided he will never sell it below $52. The company has now underperformed for multiple quarters as per street analysts, and the stock is down to $48. Pemberton continues to hold the stock in line with his original plan. In this case, Pemberton may be exhibiting A) herding bias. B) regret aversion bias. C) anchoring bias. D) overconfidence bias.

C

Relatively high portfolio volatility is most tolerable to investors with A) a diversified portfolio B) a short-term time horizon C) a long-term time horizon D) an intermediate-term time horizon

C

To maintain the proper portfolio balance for a client, it would be most appropriate to review the portfolio at least A) every 10 years B) client and portfolio review is not necessary C) annually D) every two years

C

Which of the following is the least significant consideration in making an investment recommendation to a client? A) Age B) Investment objectives C) Education D) Net worth

C

In determining an investor's risk tolerance, an investment adviser representative must consider level of tolerance toward market volatility investment time horizon, long term or short term liquidity requirements investment temperament

1, 2, 3, 4

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 gold jewelry loan secured by the family automobile the amount paid thus far this year for Botox injections the balance owed to the dentist for new crowns

1, 2, 4

When performing a capital needs analysis for a client, factors to be considered would include the client's projected earnings the projected inflation rate projected market volatility the client's age

1, 2, 4

Which of the following would be appropriate actions when using a model portfolio for a client? Gather information from the client to establish his risk tolerance, time horizon, and investment expectations. Select a portfolio mix that is appropriate for the client based upon his risk tolerance, time horizon, and investment expectations. Place the client's assets into the model portfolio regardless of his comfort level with your recommendation. Periodically review the portfolio to determine if any changes or modifications are necessary.

1, 2, 4

An agent's recommendation for the purchase of a municipal security to a customer who wants fixed income and is in a relatively low tax bracket would in most cases be unsuitable and unethical a securities felony grounds, in extreme cases, for suspension or revocation of the agent's license outside regulatory jurisdiction

1, 3

An investment adviser representative is meeting with a potential advisory client. Among the items of information the IAR needs to obtain in order to develop the proper plan are the prospect's anticipated number of years until retirement location of current bank and brokerage accounts current savings and investments college alma mater

1, 3

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

1, 3

A client profile is not complete without a family income statement. A typical one would include dividends credit card debt autos mortgage interest

1, 4

If a customer purchases shares in a municipal bond fund, which of the following statements are true? Dividends are subject to federal income tax Dividends are not subject to federal income tax Capital gains distributions are subject to federal capital gains tax. Capital gains distributions are not subject to federal capital gains tax.

2, 3

An investment advisory firm requires all new clients to complete a 4-page questionnaire before conducting the first meeting. This would be known as A) the information-gathering stage. B) fulfilling the requirements of the CIP. C) the investment adviser's brochure. D) the client disclosure document.

A

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 A) educational background B) annual income C) investment experience D) age

A

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 A) workers' compensation B) Social Security disability payments C) disability income insurance D) proceeds of a life insurance policy

D

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 A) properly, because Treasury notes are suitable for a risk-averse customer B) improperly, because Treasury notes are unsuitable for a risk-averse customer C) properly, because Treasury notes carry no risk of principal default D) improperly, because the agent failed to disclose that the customer retains interest rate risk

D

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 A) overconfidence. B) confirmation bias. C) anchoring. D) herd mentality

D

Which of the following mutual funds should an investment adviser representative recommend to a client whose objective is current income with moderate risk? A) Money market fund B) High-yield bond fund C) Aggressive growth fund D) Preferred stock fund

D

Which of the following will most likely be the most volatile investment over a short-term period? A) An intermediate corporate bond fund B) A money market fund C) An intermediate municipal bond fund D) A growth-oriented common stock fund

D

A client of an investment adviser excitedly calls the adviser with the news that he is now going to handle his own investments. "I just read some great investment books, and now I know what to do." Based on the study of behavioral finance, it would appear that this individual is A) anchored. B) overconfident. C) conservative. D) following the herd.

B

A client with 25 years until retirement should invest primarily in A) private placements B) common stocks C) preferred stocks D) bonds

B

A couple, ages 63 and 66, are long-time clients of your firm and are in good health. They plan to retire from gainful employment in 4 years and wish to discuss decumulation strategies. One of the important factors to consider is the time horizon for this couple. Which of the following would be the best estimate to use? A) 8 years B) 25 years C) 4 years D) 10 years

B

It is generally accepted that agents and IARs will give greater consideration to which of the following when making recommendations to their senior clients? Age Life stage Retirement savings Tax status

2, 3 All of these are important suitability considerations for all customers. But when it comes to seniors, it is felt that life stage (including whether the customer is employed, retired, or nearing retirement) and current retirement savings relate particularly to seniors.

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? The investor is 65 years old and needs the reliability of current income. The investor is 45 years old and has purchased these in an IRA rollover account and wants the assurance of funds for retirement. The investor is 30 years old and has a newborn child and wishes to assure funds for a college education. The investor is 20 years old, has just received an inheritance, and wishes to shelter income for as long as possible.

2, 3 Zero-coupon bonds maturing in 18 years would assure the 45-year-old of the face value at age 63. Being in an IRA, there would be no current taxation and, upon maturity, if desired, the funds could be distributed without the 10% penalty. Zero-coupon bonds are one way to guarantee funds for college education. However, with no current income, they would not be suitable for the 65-year-old and would not offer any tax shelter to the 20-year-old.

Which of the following should be considered by an investment adviser in determining whether a specific investment is suitable for an individual investor? The past performance of the investment The investor's anticipated time horizon The amount of remuneration to the broker-dealer and to the agent The level of the investor's acceptance of risk and volatility

2, 4

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 the client is an accredited investor having a net worth in excess of $1 million a home equity loan could more than double the amount of funds available to invest as a retiree, any losses suffered cannot be made up from current income the client's time horizon could be as long as 20 years

3, 4 One of the risks facing senior investors who are retired is that, unlike those still employed, loss of principal can be devastating. With today's medical advances, a 72-year-old can be looking at 15 to 20 additional years of life. Therefore, recommendations must be made to maximize the probability of the client's assets lasting that long. Effective with the Dodd-Frank Act of 2010, this investor is no longer accredited because the value of the primary residence must be excluded from the net worth computation. And, even if he were, eligibility does not equal suitability.

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

4 A customer with no source of income needs an investment portfolio to generate income. Suitable investments would be income securities that pay interest (bonds) or dividend-oriented stocks (preferred stocks and the common stock of public utility companies). Speculative stocks and growth stocks typically pay little or no dividends because any profits generated are being reinvested in the company's growth by the board of directors instead of distributed to the shareholders.

Low risk tolerance and high liquidity needs are typical characteristics of which type of institutional investor? A) Banks B) Foundations C) Defined benefit pension plans D) Trusts

A As with so many suitability questions, students frequently have to sit back and try to find a logical answer. Although the risk tolerance for all of these choices tends to be on the lower end of the scale, banks are different when it comes to liquidity needs. Banks tend to have high liquidity needs because they must be ready to meet withdrawals at any time by depositors. The nature of foundations, defined benefit pension plans, and trusts is such that they typically have lower liquidity needs than banks.

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? A) Intermediate-term municipal bond fund B) High-yield bond fund C) Money market fund D) Long-term municipal bond fund

A When the question states a high-income tax bracket, the answer will almost always be municipal bonds. An intermediate-term municipal bond fund will experience less price fluctuations when interest rates change than would a long-term municipal bond fund due to its shorter duration. Even if the high-yield bond fund might produce a greater yield after taxes, it would not be suitable for an investor with a moderate risk tolerance. Money market funds will provide safety from large swings, but even if it is a municipal money market fund where the income would be tax-exempt, the current income would be too low to be attractive to this investor.

A married couple in their early 50s saving for retirement would most likely have which of the following objectives? A) High risk, moderate safety, low liquidity B) Moderate risk, moderate safety, low liquidity C) Low risk, high safety, high liquidity D) Moderate risk, low safety, high liquidity

B

You are doing an investment plan for a new client, age 55, who plans to retire at age 70. The client is somewhat risk averse and wants to preserve capital while at the same time not falling prey to possible inflation. Which of the following portfolios would probably be most suitable? A) 40% high-yield bonds; 60% large-cap stocks B) 60% high-quality bonds; 30% large-cap stocks; 10% cash equivalents C) 90% high-quality bonds; 10% large-cap stocks D) 90% large-cap stocks; 10% high-quality bonds

B Although it is possible to debate this choice (but don't), NASAA would suggest that the bonds and cash offer sufficient capital preservation while this proportion of equities will combat the risk of inflation. High-yield (junk) bonds have no place in the portfolio of a risk-averse investor.

For which of the following business entities would suitability be based on the objectives of all the owners on a collective basis? A) Sole proprietorship B) General partnership C) C corporation D) Pension plan

B Because all the partners in a general partnership share collective liability, the investment policy to be followed in the business's account is based on the collective suitability of all partners. Although the suitability is based on the owner of a sole proprietorship, there is only one owner, so a question asking about collective suitability doesn't ring true for that.

A customer has a financial commitment of $200,000 that will come due in 2 years. In the interim, the customer wishes to invest the $200,000 to maximize income and have the money available for the obligation in 2 years. You should recommend investments in A) large-cap stocks B) government securities with two year maturities C) municipal bonds purchased at par with 20-year maturities D) preferred stock purchased in a private placement

B The Uniform Securities Act requires that all recommendations to a customer be consistent with that customer's investment objectives and financial situation. This particular customer needs to have principal available in 2 years and wants to invest for income in the interim. Time horizon is one of the most important constraints an investment adviser must consider. Of the choices listed, only government securities with 2-year maturities meet both criteria.

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? A) 50% government bond fund, 50% large-cap fund B) 50% large-cap stock fund, 40% municipal bond fund, 10% money market fund C) 70% large-cap stock fund, 20% balanced fund, 10% money market fund D) 70% high-yield corporate bond fund, 20% growth fund, 10% government bond fund

C

Your client asks for a recommendation for her emergency fund. You would most likely suggest A) a diversified common stock mutual fund because of its high degree of liquidity B) a corporate bond mutual fund because of its high degree of income and liquidity C) a money market mutual fund because of its high degree of liquidity D) a money market mutual fund because of its fixed rate of return

C

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 A) interest rate risk B) business risk C) market risk D) liquidity risk

C This short time horizon is a serious constraint and a portfolio that is largely equities, subjects the account to too much market risk. If the child had been 5 years of age, giving the client a 13-year time horizon, this would have made more sense.

An investment adviser representative has a 78-year-old prospect living on $26,400 per year from Social Security plus investment income. The individual's net worth is $141, 000 including the equity in her primary residence. Her net worth was higher until recently, but the aggressive fund she owns in the KAPCO family of funds is down over $20,000 in value. Which of the following would you recommend to her? A) Sell her fund shares and reinvest in a vehicle offering her deferred accumulation B) Liquidate the fund shares and put the proceeds in a bank CD C) Invest in a municipal bond fund D) Switch to a more conservative fund in the same family of funds

D

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 A) pay off all outstanding debts and invest the rest in municipal bonds. B) immediately purchase two lump-sum variable annuities to secure their retirement future. C) invest the funds in an aggressive stock fund. D) invest $5,900 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.

D

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 A) tell the client he will make some changes, but keep the original portfolio because that really is in the client's best interest B) drop the client C) prepare a new portfolio that is more in line with what the customer has indicated he is comfortable with D) attempt to educate the client to correct those misconceptions, but leave the final decision up to the client

D

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 A) salary B) income taxes C) interest on savings D) assets

D

If your clients, spouses both age 50, are interested in long-term growth and are willing to accept a moderate amount of risk, you should recommend A) a money market fund B) an equity/income fund C) a municipal bond fund D) a large-cap stock fund

D

Of the following stocks, which would be the most suitable for a conservative, risk-averse investor? A) Small-cap medical technology company B) Mid-cap software company C) Large-cap cyclical company late in the economic cycle D) Large-cap consumer goods company

D

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 A) the client's bank and brokerage statements. B) the client's tax returns. C) the client's life insurance policies. D) the client's social media accounts.

D

Which of the following would be the most appropriate portfolio mix for an aggressive investor? A) 20% cash equivalents, 30% bonds, and 50% stocks B) 30% cash equivalents, 50% bonds, and 20% stocks C) 60% cash equivalents, 25% bonds, and 15% stocks D) 10% cash equivalents, 20% bonds, and 70% stocks

D

You are onboarding a new client. Which of the following is the least important indicator of the client's risk tolerance? A) Attitude toward taking a loss B) Current age C) Expected retirement date D) Highest education level

D

Your firm onboards a new investment advisory client. Which of the following would be the most appropriate way to obtain information about the client's objectives and constraints? A) Client's LinkedIn page B) Monitoring the client's Tweets C) Interview with the client's neighbors D) Face-to-face meeting at the client's home

D

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 A) a home equity loan with a $15,000 balance B) a $20,000 loan for undergraduate school with a due date in 6 years C) a $100,000 loan for law school with a due date in 10 years D) rolling over a 401(k) into an IRA

D A capital needs analysis attempts to determine money that would be needed in the event of an individual's sudden passing. Included would be any outstanding debt obligations, regardless of when they are due (they will have to be paid off sometime). However, an asset such as the 401(k) is not a need; it is something that will help meet the need.

Your elderly client has $10,000 to invest and seeks preservation of capital and a moderate income stream. If she has never invested in mutual funds before and all of her savings are in bank CDs and saving accounts, you should recommend A) a tax-exempt bond fund B) a T-bill C) a government bond fund D) a money market fund

D A money market fund is the most appropriate for an elderly person seeking preservation of capital and some income on a regular basis. A T-bill, although safe, provides interest income only at maturity. Because the client has never invested in mutual funds before, she may be uncomfortable with the potential fluctuations in principal of the bond funds. This exam will not want you to go so far as to claim, "but if the client purchased 4-week T-bills, there would be the ultimate safety and income every 28 days." No client with this background is going to be trading every month—don't go there.