Unit 6 Client Personal Profile
What is the net worth of a customer with the following personal balance sheet? Cash $20,000. Municipal bonds $75,000. 401(k) account value $150,000. Salary $80,000 per year. Cars $30,000. Home $250,000. Miscellaneous (jewelry, etc.) $50,000. Personal loan $10,000. Car loan $20,000. Mortgage $150,000. Monthly mortgage payment $1,500. A) $95,000. B) $245,000. C) $473,500. D) $395,000.
Answer: D 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.
Assets that might be found on a family balance sheet include: car loan. gold watch. Keogh plan. salary. A) III and IV. B) II and III. C) I and II. D) I and IV.
Answer: B An asset is something that is owned. Jewelry is part of the family's assets, as is the value of any retirement plan. A loan is a liability (the car is the asset), and salary represents income.
One respect in which an investment adviser differs from an agent for a broker/dealer is that of fiduciary responsibility to the client. Therefore, the IA will have greater concerns about various needs and attitudes of the client when making recommendations. Included in those concerns would be the client's expectation of rewards emotional risk tolerance retirement plan vested balance time horizon A) II and IV B) I, and IV C) I and II D) I, II, III and IV
Answer: D The client's expectation of rewards is a determining factor in the risk/reward concept. Risk tolerance and time horizon are always major considerations. The vested balance in the client's retirement plan is a critical factor in determining what additional, (if necessary) will be necessary to meet retirement goals.
The three parts of a family balance sheet are: A) income, liabilities, and net worth. B) assets, expenditures, and balance. C) income, liabilities, and balance. D) assets, liabilities, and net worth.
Answer: D The balance sheet formula is assets − liabilities = net worth.
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) Risk tolerance B) The client's marginal tax bracket C) Vested interest in the employer's 401(k) plan D) Income from rental properties
Answer: A A client's risk tolerance is a nonfinancial 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.
A client profile is not complete without a family income statement. A typical one would include: dividends. credit card debt. autos. mortgage interest. A) III and IV. B) I and IV. C) I and II. D) II and III.
Answer: B 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.
John and Jane have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills totals $8,000, how much are their total liabilities? A) $122,000. B) $138,000. C) $150,000. D) $130,000.
Answer: D The balance sheet formula is assets − liabilities = net worth. Therefore, $150,000 − liabilities = $20,000, where liabilities = $130,000. Did you answer $122,000? That is the amount of the liabilities other than the revolving credit, but that is not what the question is asking for.
When making a customer profile, one of the documents created is a balance sheet. Among other items, your client's balance sheet would include: A) assets. B) interest expense. C) accumulated depreciation. D) salary or wages.
Answer: A A balance sheet, whether for an individual, a family, or a business, is a listing of assets and liabilities. Interest expense and salary go on the income statement. Accumulated depreciation is a balance sheet item, but only for a business.
Which of the following is the least significant consideration in making an investment recommendation to a client? A) Education. B) Age. C) Net worth. D) Investment objectives.
Answer: A When making suitable investment recommendations, agents must take the client's age, net worth, and investment objectives into consideration. A client may not have a college education, but may be more sophisticated financially than a PhD in English literature.
An individual's net worth is: A) another term for discretionary income. B) the difference between the individual's assets and the individual's liabilities. C) best determined by examining the individual's personal income statement. D) largely irrelevant in identifying the individual's investment objectives
Answer: B An individual's net worth is the difference between the individual's assets and the individual's liabilities. It is determined from the personal balance sheet rather than from the personal income statement. Net worth is relevant in determining an individual's investment objectives. Someone with a negative net worth might find it preferable to reduce his debt level before beginning an investment program.
An individual's net worth is: A) another term for discretionary income. B) the difference between the individual's assets and the individual's liabilities. C) best determined by examining the individual's personal income statement. D) largely irrelevant in identifying the individual's investment objectives.
Answer: B An individual's net worth is the difference between the individual's assets and the individual's liabilities. It is determined from the personal balance sheet rather than the personal income statement. Net worth is relevant in determining an individual's investment objectives.
Which of the following items is NOT necessary to establish before helping a client open an investment account? A) Adequate life insurance. B) Established short- and long-term investment goals. C) Zero balance on all credit cards. D) Emergency fund.
Answer: C 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.
An investment adviser representative's client lost her father to lung cancer. Among the assets bequeathed to her were 2,000 shares of a tobacco stock. Which of the following is NOT a consideration when recommending to her what to do with the stock? A) Her employment situation. B) Her financial goals. C) Her father's years of investment experience. D) The cause of her father's death.
Answer: C An adviser's recommendations to a client are not impacted by the degree of someone else's investment experience or knowledge. In this case, one could expect some resentment towards holding shares of a tobacco company when the cause of a loved one's death is lung cancer.
A client with a demand deposit account would expect the funds to be A) long-term with a low return B) long-term with a high return C) short-term with a low return D) short-term with a high return
Answer: C In deposit terminology, the term demand deposit account, (sometimes referred to as DDA), refers to a type of account held at banks and financial institutions that may be withdrawn at any time by the customer. The majority of such demand deposit accounts are checking and savings accounts. With the immediate availability of funds, it is appropriate to look at these as short-term money and, as is usually the case, the shorter the length, the lower the return.
In determining an investor's risk tolerance, the investment adviser representative must consider: level of tolerance toward market volatility. investment time horizon, long-term or short-term. liquidity requirements. investment temperament. A) I, II, III and IV. B) I only. C) I and II. D) I, II and III.
Answer: A The investment adviser representative must consider a client's volatility tolerance, investment time frame, liquidity needs, and comfort with different types of investments. These are all elements in understanding a customer's attitude toward risk.
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) Establish an emergency fund. B) Set goals and dates for reaching them. C) Pay off credit card debt. D) Determine a reasonable fee for designing the plan.
Answer: A 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.
Your 47 year-old client plans to retire at age 65. When constructing a recommendation for the client's $850,000 IRA rollover account, your first consideration should be the client's: A) risk tolerance. B) tax status. C) planned retirement age. D) liquidity needs.
Answer: A While tax status, planned retirement age, and liquidity needs are important considerations in determining a client's investment profile, the first concern that should be addressed in this case is the client's risk tolerance.
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.
Answer: B A client's risk tolerance is among the most important non-financial considerations when recommending an investment. The risk-free rate or the Treasury bill rate has no reference to the client's investment profile, but it serves as a comparison to evaluate the additional return expected versus additional risk taken. A client's income need is a financial, not a non-financial, consideration, and must be considered when determining the suitability of investments. The amount of assets the client has with the investment adviser representative is a financial, not a nonfinancial, consideration.
In order to determine the availability of funds for continuous investment, an IAR should prepare a statement of cash flows for her clients. When prepared for the family, this cash flow statement would include all of the following items EXCEPT: A) taxes. B) assets. C) salary. D) expenses.
Answer: B Assets belong on a balance sheet, they are not part of cash flow. Cash flow analysis for a family indicates the extent to which more money is coming in than is going out (or, unfortunately, sometimes the reverse). Salary is a reflection of money in, while expenses and taxes are money going out.
As part of your annual review for clients, you perform a net worth computation. You have computed a specific client's net worth at $500,000. This client calls you and asks what his net worth will be after withdrawing $4,000 from his savings account to pay off credit cards, taking another $5,500 to deposit to his IRA and buying a $25,000 home theater system using store credit. You would respond that the client's net worth is now: A) $491,000.00 B) $500,000.00 C) $466,000.00 D) $475,000.00
Answer: B In each case, we have an asset offsetting a liability so there is no change to the net worth.
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. A) III and IV. B) I and III. C) I and II. D) II and IV.
Answer: B Proper investment planning involves saving for retirement and what steps are taken to reach that goal are influenced by the time remaining. Future plans are developed using current assets as the starting point. We don't care where the assets are, just what they are.
When preparing a client profile, it is prudent to investigate the prospect's non-financial considerations. Included would be that client's: attitudes. demographics. experience with investments. values. A) I and III. B) I, II, III and IV. C) I, II and IV. D) II and IV.
Answer: B These are included in the list of non-financial considerations when constructing a client profile. One of the reasons we list demographics is that certain ethnic or religious groups tend to follow patterns different from the society as a whole. The same can be said about some geographic areas.
In making suitable investment recommendations, the least significant element would be the client's: A) death and disability needs. B) current income. C) educational level. D) retirement needs.
Answer: C A client's educational level is not as important as retirement needs, death and disability needs, and current income. However, the agent should take note of the client's educational level to ensure that the client fully understands the investments recommended. Also, a person with a professional educational background may have more employment opportunities and be able to take more risk as a result.
