Unit 19 Type of Client

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

A. A capital needs analysis is used to help determine the proper amount of life insurance that will provide for the family's needs in the event of premature death of the primary breadwinner. The agent would factor in the client's projected earnings until retirement and, in order to do that, would need to know the current age. In addition, to be sure to allow for enough to keep up with the rising cost of living, the projected inflation rate is needed. However, market volatility does not impact the analysis because the amount of the selected death benefit will remain constant, regardless of changes to the market. U19LO5

Of the following securities, which is most commonly recommended to fund a child's college education? A) Zero-coupon Treasury bonds B) Treasury bills C) Municipal bonds D) Investment-grade corporate bonds

A. Zero-coupon bonds, particularly those carrying the guarantee of the U.S. Treasury, are a favored investment vehicle for saving for a child's higher education. They have the advantage of providing a certain, quantifiable sum at a certain date in the future. U19LO5

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

B. Those injured on the job are usually eligible for workers' compensation. Those who have enough eligible credits may apply for Social Security disability benefits. If the individual owns private disability insurance and/or is covered under an employer-sponsored policy, he may claim benefits. Although there is a trend toward making life insurance benefits available for use in certain instances, for test purposes the proceeds are generally only available upon the death of the insured. U19LO5

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

C. 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. U19LO5

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

C. Because stocks are more volatile than bonds, a growth-oriented stock fund will be more volatile than bond funds. U19LO6

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) International funds B) Blue-chip stocks C) A money market fund D) U.S. Treasury bonds

C. 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. U19LO5

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) Determine a reasonable fee for designing the plan B) Set goals and dates for reaching them C) Establish an emergency fund D) Pay off credit card debt

C. 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. U19LO2

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 mix of investment-grade bonds and cash/cash equivalents B) A mix of high-yield bonds and cash/cash equivalents C) A preponderance of growth stocks and limited partnership vehicles D) A preponderance of speculative stocks and high-yield bonds

A. An individual with an investment objective of capital preservation should be investing in a mix of investment-grade bonds and cash/cash equivalents. Lower-risk capital appreciation vehicles, such as large-cap common stock, should also be considered. The other choices noted are too risky for a risk-averse investor. U19LO6

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

A. Income statements reflect the family's income and expenses, not assets and liabilities. Dividends represent money received, and mortgage interest is money paid out. Credit card debt is a liability and autos are assets. U19LO2

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) ATF Overseas Opportunities Fund C) RST Balanced Fund D) ABC Stock Index Fund

A. These clients cannot afford a downturn in the stock market between now and the time they want to send their children to college. An investment-grade bond fund will provide the income and safety required for accumulating additional funds for college expenses. U19LO6

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

C. 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. U19LO6

A 78-year-old retiree has a $100,000 CD maturing and is dissatisfied with current yields on CDs. Aside from Social Security and a monthly pension, the $100,000 is his total liquid net worth. The agent recommends investing the funds in a single premium immediate variable annuity and allocating funds to the separate account as follows: Medical Technology − $10,000 High Yield Corporate − $40,000 Growth & Income − $50,000 The agent's recommendation is

C. With half of the investment allocated to medical technology and high-yield separate accounts, which carry a higher risk, the allocation seems unsuitable for a 78-year-old needing this monthly income. U19LO6

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) Inadequate life insurance coverage B) Alternative minimum tax C) Inadequate funding for college savings D) Too high a percentage of the retirement plan invested in the company's stock

A. 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. U19LO5

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 government bond fund B) a T-bill C) a money market fund D) a tax-exempt bond fund

C. 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. U19LO6

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) urge the customer to reconsider his investment strategy D) construct a growth-oriented portfolio

C. 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. U19LO6

A newlywed couple with a combined income of $46,000 recently opened 2 IRA accounts with you. You receive a call from them asking for advice on the best investment for a sizable and unexpected inheritance they have just received. The most suitable recommendation for the couple is to A) invest the funds in an aggressive stock fund B) immediately purchase 2 lump-sum variable annuities to secure their retirement future C) invest $6,000 into a stock index fund in both IRA accounts and place the remaining funds in a money market account until their new financial situation can be evaluated D) pay off all outstanding debts and invest the rest in municipal bonds

C. The couple's new IRA accounts are an indicator that retirement savings is a primary goal, therefore making maximum contributions as soon as possible is suitable. Because the funds were unexpected, it would be prudent for the couple to place any additional funds in a liquid money market account until they have time to reevaluate how this windfall may change their financial objectives and time horizon. There is no indication that the couple has a high risk tolerance, so an aggressive stock fund would be unsuitable, as would tax-free municipal bonds based on the couple's income level. Variable annuities may be suitable, but it is not the most suitable answer choice in this case. U19LO6

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) tactical asset allocation B) a capital need C) an investment constraint D) planning too late

C. Time constraints include such conditions as liquidity and time horizon, both of which are in play here. It may be true that the client has started too late, but that is not what the exam would be looking for as the correct answer. U19LO5