SERIES 65 CHAPTER 17 PART 2
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 mix of investment-grade bonds and cash/cash equivalents
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 money market fund
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?
ABC Equity Income Fund
When dealing with suitable recommendations to clients, it is important to distinguish between investment objectives and investment constraints. Which of the following would be an investment objective rather than a constraint?
Current income
If a 65-year-old woman of substantial means is seeking income and preservation of capital, which of the following should you recommend?
Government bond fund, corporate bond fund, municipal bond fund
Which of the following types of mutual funds would be most likely to have capital appreciation as its stated objective?
Growth
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?
Growth and income mutual funds
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.
Herding
It is generally accepted that agents and IARs will give greater consideration to which of the following when making recommendations to their senior clients? I. Age II. Life stage III. Retirement savings IV. Tax status
II and III
Which of the following statements about investment constraints is least accurate?
Investors with short time horizons are not likely to worry about liquidity.
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?
LMN Investment-Grade Bond Fund
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
Mary is not entitled to any of Charlie's Social Security benefit.
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?
Money market
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?
Money market mutual funds
Charles wishes to preserve his capital and generate income with moderate risk by investing in mutual funds. Which of the following mutual fund types would probably least meet these investment objectives?
Technology funds
Which of the following best describes a global mutual fund?
The portfolio consists of securities of companies domiciled throughout the world, including the United States.
Which of the following items is not necessary to establish before helping a client open an investment account?
Zero balance on all credit cards
An investment company that invests in common stock, preferred stock, and bonds would most likely be classified as
a balanced fund.
Relatively high portfolio volatility is most tolerable to investors with
a long-term time horizon
To maintain the proper portfolio balance for a client, it would be most appropriate to review the portfolio at least
annually.
In making suitable investment recommendations, the least significant element would be the client's
educational level
An investment adviser would be least likely to gather information about a new client
from social media.
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
government securities with two year maturities
In determining suitability for a client who has recently opened a new account, an agent should NOT:
make assumptions on behalf of the client if he refuses to supply financial information.
One respect in which an investment adviser differs from a broker-dealer is that of fiduciary responsibility to the client. Therefore, the investment adviser will have greater concerns about various non-financial needs and attitudes of the client when making recommendations. Included in those concerns would be all of these except
the client's retirement plan vested balance.
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
unsuitable primarily because of the customer's age, objectives, and risk tolerance
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
urge the customer to reconsider his investment strategy
An individual owns assets worth $500,000 and has debts of $300,000. What is the individual's net worth?
$200,000
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?
25 years
Low risk tolerance and high liquidity needs are typical characteristics of which type of institutional investor?
Banks
Which economic concept attempts to explain why investors behave irrationally?
Behavioral finance
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?
Determining which securities to purchase for the client's investment portfolio
You are onboarding a new client. Which of the following is the least important indicator of the client's risk tolerance?
Highest education level
Lucy and Rick, ages 52 and 47, respectively, are concerned that they will not have enough money to retire comfortably at Lucy's age 70. Lucy was recently promoted to district manager of an inventory control company. Along with the promotion, they have an additional $400 per month they would like to invest into a new retirement investment portfolio. They consider themselves aggressive risk takers with a long-term time horizon. Based on their profile, which of the following portfolios should the firm recommend to Lucy and Rick for investment? I. Portfolio 1—20% Balanced Fund, 60% High-Yield Bond Fund, 10% Emerging Markets Fund, 10% International Stock Fund II. Portfolio 2—70% S&P 500 Index Fund, 20% Corporate Bond Fund, 10% International Stock Fund III. Portfolio 3—60% Russell 2000 Index Fund, 30% U.S. Government Securities Fund, 10% Money Market Fund IV. Portfolio 4—20% S&P 500 Index Fund, 40% Corporate Bond F
Portfolio 2
Which of the following mutual funds should an investment adviser representative recommend to a client whose objective is current income with moderate risk?
Preferred stock fund
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?
Values
A benefit of waiting until the age of 70 to claim Social Security benefits is that
benefits are increased by 8% for each year from the full retirement age.
When attempting to determine the appropriate life insurance coverage to meet a client's goals and objectives, a tool that is frequently used is a:
capital needs analysis.
A client excitedly calls his investment 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
overconfident.
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?
$130,000
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 $6,000 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
$500,000
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?
60% high-quality bonds; 30% large-cap stocks; 10% cash equivalents
An investment adviser representative prepares a detailed portfolio restructuring for a new client. The client is not impressed with the recommendation, and at least to the IAR, it appears that the rejection is more due to a lack of understanding than a valid dislike. What should be the first step taken by the IAR?
Attempt to educate the client as to what this portfolio is trying to accomplish for the client while at the same time recognizing that the final decision is clearly in the hands of the client.
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?
Attitude
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?
Bank-insured CDs
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?
Bank-insured CDs
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?
Establish an emergency fund
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?
Face-to-face meeting at the client's home
Which of the following would be most useful information for an IAR attempting to determine the ability of a client to have the necessary funding to purchase an investment with a $25,000 minimum entry level?
Family balance sheet.
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?
How the funds are spent after being withdrawn from the portfolio
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 I. unsuitable and unethical II. a securities felony III. grounds, in extreme cases, for suspension or revocation of the agent's license IV. outside regulatory jurisdiction
I and III
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
I, II, and IV
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?
Investment-grade corporate bond.
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?
Switch to a more conservative fund in the same family of funds
Which of the following situations would most likely cause an individual's application for a disability income insurance policy to be denied?
Working in a hazardous occupation
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 large-cap stock fund
In making suitable investment recommendations, the least significant element would generally be the client's
educational level
It would be correct to state that when an investor has a longer time horizon,
the need for liquidity is less important
One of the most important benefits of investing in index mutual funds is
their very low expense ratio
When preparing a client profile, it is prudent to investigate the prospect's non-financial considerations. Included would be that client's: I. age. II. attitudes. III. experience with investments. IV. values.
I, II, III, and IV.
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 money market fund
In determining an investor's risk tolerance, an investment adviser representative must consider I. level of tolerance toward market volatility II. investment time horizon, long term or short term III. liquidity requirements IV. investment temperament
I, II, III and IV
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
the objectives of all the partners on a collective basis.
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
the sole proprietor
Which of the following investment strategies would be appropriate for an advisory client with a 20-year time horizon before retirement? I. Holding more stock II. Holding less cash III. Holding fewer bonds
I, II, and III
If a customer purchases shares in a municipal bond fund, which of the following statements are true? I. Dividends are subject to federal income tax II. Dividends are not subject to federal income tax III. Capital gains distributions are subject to federal capital gains tax. IV. Capital gains distributions are not subject to federal capital gains tax.
II and III
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
anchoring.
All of the following are characteristics typical of a money market fund except
it has a high beta and is safest in periods of low market volatility.
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
behavioral finance
An adviser always inquires into her clients' investment objectives, financial situations, and needs. The investment adviser is
obtaining the information required to fulfill her professional obligation regarding suitability.
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
anchoring bias.
An investment adviser using an insurance approach to capital needs analysis would
determine the insurance coverage needed to complete the customer's financial objective should the customer die before the objective is met
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
market risk
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?
Municipal GOs
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 municipal bond fund
A retired person seeking to maximize income with reasonable safety and liquidity should most likely consider investing in
an intermediate-term, high-grade corporate bond fund
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?
Nonfinancial
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
an investment constraint
If an investment adviser uses a client questionnaire to determine a client's financial situation, the adviser is
acting ethically, as the information is necessary to determine the suitability of recommendations.
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
has insufficient retirement savings.
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
herd mentality.
An investment adviser representative has constructed a portfolio for a client that is 20% U.S. government bonds, 20% corporate bonds, 20% preferred stock, 15% common stock in public utilities, 10% in cash and 15% in small cap stocks. From this, you could safely assume that the client's investment objective is:
income.
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
overconfidence.
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
both, because information regarding all owners is relevant.
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
risk tolerance
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
risk tolerance
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
wait to see if there are further causes for concern about his capabilities
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 I. anticipated number of years until retirement II. location of current bank and brokerage accounts III. current savings and investments IV. college alma mater
I and III
