STC Series 7 Chapter 1 test
All other considerations being equal, which of the following can likely tolerate the highest degree of risk in her portfolio? A. A thirty-five-year-old B. A fifty-five-year-old C. A sixty-five-year-old D. An eighty-five-year-old
A. A thirty-five-year-old Generally, the younger a person is, the more risk the person can tolerate. A thirty-five-year-old is in her prime earning years and will have many years to earn income to replace investment losses. Also, a younger person's time horizon tends to be longer.
Of the following factors, which would be the most important to consider when analyzing a client's investment portfolio who has retirement as her primary investment objective? A. Age B. Net worth C. Education level D. Previous investment history
A. Age When analyzing a client's existing portfolio to determine how it affects recommendations you might make, it is important to consider a client's investment objectives and the length of time available to try to meet those objectives. When retirement is the primary objective, it is very important to know the client's age. The other items mentioned are also valuable for an RR to know, but they are not as critical as knowing the client's age.
Which of the following factors is the MOST important to consider when analyzing the investment portfolio of a client who has retirement as her primary investment objective? A. Age B. Net worth C. Education level D. Previous investment history
A. Age When analyzing a client's existing portfolio to determine how it affects recommendations you might make, it is important to consider a client's investment objectives and the length of time available to try to meet those objectives. When retirement is the primary objective, it is very important to know the client's age. The other items mentioned are also valuable for an RR to know, but they are not as critical as knowing the client's age.
A customer's investment profile would include all of the following information, EXCEPT the: A. Amount of taxes paid by the customer B. Investment experience of the customer C. Risk tolerance of the customer D. Other investments held by the customer
A. Amount of taxes paid by the customer Broker-dealers have a suitability obligation to all customers. For noninstitutional or retail customers, the broker-dealer (or registered person at the firm) must have a reasonable basis for recommending a transaction based on information obtained from the customer concerning his investment profile. This would include the customer's age, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance. The tax status is a component of an investor's investment profile, but not the amount of taxes paid.
Investors with high incomes and high net worth: A. Always have a high tolerance for risk B. Can generally tolerate more risk than investors with low incomes and low net worth C. Are never risk-averse D. Are always suitable for aggressive investments
B. Can generally tolerate more risk than investors with low incomes and low net worth Investors with high incomes and high net worth generally have higher risk tolerances than investors with more modest financial resources. However, financial resources are not the only elements that determine an investor's risk tolerance. Personality type, age, and other considerations also help determine a person's ability and willingness to assume risk. The courts and regulators have made it clear that an investment is not suitable simply because the client could afford to lose the money.
When a registered representative makes a recommendation to a customer involving a leveraged exchange-traded fund (ETF), he will consider which TWO of the following factors to be MOST important? I. The security may be recommended to at least some investors II. The security may be able to produce a profit over a long period III. The security may be able to be sold quickly IV. The security may be a good investment for a specific customer A. I and III B. I and IV C. II and III D. II and IV
B. I and IV Although all of the choices are important factors for determining the suitability of a recommendation, the FINRA suitability rule has listed three main suitability obligations. The reasonable-basis obligation requires a member firm and an RR to have a reasonable basis to believe that the recommendation is suitable for at least some investors. If the firm or its RRs do not understand the product, it should not be recommended to customers. The customer-specific obligation requires the member firm and an RR to have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer's investment profile. A customer's investment profile would include, but is not limited to, the customer's age, other investments, financial situation and needs, tax status, investment objectives and experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose. Even though a customer is not obligated to provide all of this information, the RR should try to obtain the information necessary to make a suitable recommendation. The quantitative obligation requires the member firm and an RR to have a reasonable basis for believing that a series of recommended transactions, even if suitable for a customer, are not excessive when taken together in light of the customer's investment profile.
A investor has been writing covered calls and now wants to begin writing uncovered calls. If the new approach is permitted, the investor's registered representative should update the investor's profile to show the objective to be: A. Capital appreciation B. Speculation C. Balanced D. Growth
B. Speculation Writing uncovered calls is considered one of the most speculative investment strategies since the investor is assuming potentially unlimited risk. If the new approach is permitted, the investor's objective should be identified as speculativ
Which of the following is MOST important when opening an account and making a recommendation to a customer? A. That the recommendation is suitable B. That the recommendation is in the customer's best interest C. That the recommendation has been approved by a principal D. That no recommendations are made in a newly opened account until three months have elapsed
B. That the recommendation is in the customer's best interest In general, suitability is the primary factor when making a recommendation. However, under Regulation Best Interests (Reg BI), the most important factor is that the recommendation is in the customer's best interest. Keep in mind, some recommendations may be suitable, but they may not necessarily be in the customer's best interest.
When determining whether a recommended transaction is suitable, which of the following factors is LEAST important? A. The customer's age B. The customer's liquidity needs C. The level of education the customer achieved D. The tax status of the customer
C. The level of education the customer achieved Broker-dealers have a suitability obligation to all customers. For noninstitutional or retail customers, the broker-dealer (or registered person at the firm) must have a reasonable basis for recommending a transaction based on information obtained from the customer concerning her investment profile. This would include the customer's age, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance. The educational level of the customer or what type of degree she has would be the least important factor listed.
A broker-dealer's suitability obligation is: A. To protect the customer against a loss B. A requirement by a broker-dealer to avoid conflicts of interest C. To make sure the recommended security fits the customer investment objectives D. To make sure a customer does not invest in risky securities
C. To make sure the recommended security fits the customer investment objectives Broker-dealers have a suitability obligation to all customers. For noninstitutional or retail customers, the broker-dealer (or registered person at the firm) must have a reasonable basis for recommending a transaction based on information obtained from the customer concerning his investment profile. This would include the customer's age, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance. A broker-dealer may assist a customer in limiting a loss but not guarantee a customer against a loss. Conflicts of interest must be disclosed, but do not need to be avoided. A firm may recommend that a small amount of a customer's portfolio be invested in riskier securities if they fit into an overall investment strategy.
Broker-dealers have a suitability obligation to: A. Retail customers only B. Institutional customers only C. Unsophisticated customers only D. All customers
D. All customers Broker-dealers have a suitability obligation to all customers. For noninstitutional or retail customers, the broker-dealer (or registered person at the firm) must have a reasonable basis for recommending a transaction based on information obtained from the customer's investment profile. This would include the customer's age, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance. When determining the suitability obligations of a broker-dealer concerning institutional customers, the two most important considerations are the customer's ability to evaluate the investment risk independently, and the extent to which the customer is exercising that ability in connection with the recommendation.
