Unit 17
Gathering information about a prospective advisory client would probably not be done by A) using a third party interviewer. B) personal interview. C) use of a questionnaire. D) chat over a lunch.
A) using a third party interviewer. Because of the confidentiality of the kind of information an investment adviser needs to properly act as a fiduciary in handling a new client's account, it is unlikely that the role would be delegated to an outside third party.
Which of the following would be considered an investment constraint rather than an investment goal? A) Liquidity B) Current income C) Growth of capital D) Capital preservation
A) Liquidity Investment constraints are those things that limit our ability to reach our goals. If the investor needs high liquidity, that factor will affect the investment selection process and place a limit on the available investment options.
One of your clients excitedly calls to inform you that his daughter has just been accepted for the coming year into the engineering program at one of the most respected universities in the country. She has been given a generous scholarship but that will leave the family short by about $100,000 for the four-year program. You check the client's college savings account and see that the current value is $25,000. The client offers to add another $25,000 and asks you if you think the account performance over the next four years can provide the necessary funds. You would probably reply A) that the goal seems attainable if the client is willing to assume the necessary risk. B) this is wonderful news and you are pleased that the client has selected such a worthwhile goal. C) the short time horizon is an investment constraint that will make reaching this goal highly unlikely.
C) the short time horizon is an investment constraint that will make reaching this goal highly unlikely. Investment constraints are those things that get in the way of reaching our goals. One of the most important of these constraints is the time horizon. If this client had more time, it is possible that the goal could be reached, but, under the current conditions, the risk that would have to be taken would likely be far beyond an acceptable one.
When preparing a client's personal profile, it is generally accepted that there are both financial and non-financial considerations evaluated in order to issue appropriately suitable recommendations. Which of the following would not be included in the list of financial considerations? A) Vested interest in the employer's 401(k) plan B) Risk tolerance C) Income from rental properties D) The client's marginal tax bracket
B) Risk tolerance A client's risk tolerance is a non-financial consideration; it is an attitude. Income from a rental property, tax obligations, and available retirement funds are all financial considerations that contribute to determining suitability.
Investment advisers must recognize the difference between their client's goals and objectives and investment constraints. Which of the following would be considered an objective rather than a constraint? A) Tax concerns B) Time horizon C) Changes to laws and regulations D) Income in retirement
D) Income in retirement Income, whether for current or future needs, is an objective. The other choices represent investment constraints: things that must be dealt with in order to reach the goal of meeting the objective.
Otto and Lucy set up a 529 plan to save funds for the college education of their daughter, Marangue, who is 14. What is the most suitable investment for the largest portion of their contribution? A) A growth stock fund B) An intermediate term bond fund C) A long-term bond fund D) A large-cap stock fund
B) An intermediate term bond fund This is a straight suitability question. Match the time horizon to the investment offered, and an intermediate term bond fund is the only logical answer.
A 45-year-old investor wants the greatest possible monthly income with the preservation and stability of capital as secondary objectives. Which of the following investments would you recommend? A) Money market mutual fund B) Growth and income fund C) Long-term bond fund D) Growth mutual fund
C) Long-term bond fund The only choice that provides stability of capital is the money market fund, but that is not the investor's primary objective and the monthly income is quite low. Although the two other funds don't offer stability, they certainly don't provide a high income (even the growth and income fund). If you want income, you invest in bonds, especially those with longer maturities.
Which of the following best describes the determination of a client's risk tolerance? A) The client's willingness to take risk B) The client's ability to take risk C) The client's ability and willingness to take risk D) The client's net worth
C) The client's ability and willingness to take risk Risk tolerance is a combination of two factors. One is the emotional willingness to face a loss and the other financial capacity to absorb a loss without a change in lifestyle. The client's net worth gives an indication of the capacity, but says nothing about the emotion.
If a new client has $200,000 to invest and wants to retire in 15 years, which of the following client information is least necessary for an adviser to recommend a suitable investment program? A) Current income and cash flow requirements B) The age of the client C) Tolerance toward risk D) The projected annual income needed during those retirement years
A) Current income and cash flow requirements While current income and cash flow requirements are ordinarily important considerations, in this question we are being asked about the investment of a lump sum, not periodic additional investments. The amount of income required will determine the types of investments and how they must be structured in order to achieve the retirement income desired. The client's age is necessary to determine the time horizon. That is, if the client is currently 35 and wishes to retire at age 50, the money will have to last a lot longer than if we are dealing with a 55-year-old who wishes to retire in 15 years at 70. A client's tolerance toward risk is among the most important non-financial considerations in determining investment suitability.
All of the following are reasons why broker-dealers and investment advisers gather information about their customers except A) for use in advertising. B) to maintain accurate customer records. C) to comply with BSA requirements. D) to use in determining suitability.
A) for use in advertising. It would generally be considered a violation of privacy rights to use specific customer data in advertising without express consent. This is particularly true for investment advisers where testimonials are prohibited. Information must be gathered in order to make suitable recommendations, and the Bank Secrecy Act as well as federal and state law have recordkeeping requirements.
What is the net worth of a customer with the following personal balance sheet? 1. Cash $20,000 2. Municipal bonds $75,000 3. 401(k) account value $150,000 4. Salary $80,000 per year 5. Cars $30,000 6. Home $250,000 7. Miscellaneous (jewelry, etc.) $50,000 8. Personal loan $10,000 9. Car loan $20,000 10. Mortgage $150,000 11. Monthly mortgage payment $1,500 A) $473,500 B) $395,000 C) $95,000 D) $245,000
B) $395,000 A customer's net worth equals assets minus all liabilities ($575,000 − $180,000 = $395,000). Salary and mortgage payments are income and expense items and are not part of net worth.
