Unit 19- Client Profile
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)Growth mutual fund B)Growth and income fund C)Money market mutual fund D)Long-term bond fund
D)Long-term bond fund The only choice that provides stability of capital is the money market fund, but that is not one of the investor's objectives and the monthly income is quite low. Although the 2 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.
A client who states that she wants to avoid petroleum company stocks is expressing a A)form of risk avoidance B)financial consideration C)recommendation D)non-financial consideration
D)non-financial consideration In all likelihood, this is for a personal value, an environmental concern (good data gathering would probably pick that up) and values are non-financial considerations.
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)salary or wages B)accumulated depreciation C)interest expense D)assets
D)assets 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.
Gathering information about a prospective advisory client would probably not be done by A)personal interview B)chat over a lunch C)use of a questionnaire D)using a third party interviewer
D)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.
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)$395,000 C)$473,500 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.
Which of the following would be considered an investment constraint rather than an investment goal? A)Current income B)Liquidity C)Capital preservation D)Growth of capital
B)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.
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 A)$491,000 B)$466,000 C)$500,000 D)$475,000
C)$500,000 In each case, we have an asset offsetting a liability so there is no change to the net worth.
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 large-cap stock fund D)A long-term bond 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.
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
A)risk tolerance 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.
All of the following are reasons why broker-dealers and investment advisers gather information about their customers EXCEPT A)to maintain accurate customer records B)to comply with BSA requirements C)for use in advertising D)to use in determining suitability
C)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.
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 non-financial needs and attitudes of the client when making recommendations. Included in those concerns would be all of these EXCEPT A)the client's marital status B)the client's attitudes toward the environment C)the client's retirement plan vested balance D)the client's time horizon number and age of dependents
C)the client's retirement plan vested balance 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, but is a financial rather than non-financial consideration. The other choices can't be measured in terms of dollars and cents.
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 net worth D)The client's ability and willingness to take risk
D)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.
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)Income in retirement B)Changes to laws and regulations C)Time horizon D)Tax concerns
A)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.
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)The amount of income he requires for his retirement years B)Current income and cash flow requirements C)Tolerance toward risk D)The age of the client
B)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.
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 father's years of investment experience C)The cause of her father's death D)Her financial goals
B)Her father's years of investment experience 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.
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)Income from rental properties B)Risk tolerance C)Vested interest in the employer's 401(k) plan 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.
Many financial planners recommend that clients wait until age 70 to begin their Social Security retirement benefits. The primary reason for this recommendation is that A)taking payments prior to age 70 increases the likelihood that you will run out of money sooner than if you wait B)once you've reached age 70, there is no limit to the amount that may be earned without affecting monthly payments C)by waiting, you increase the amount that Social Security will pay for burial expenses D)by waiting past full retirement age (currently 66), your payments will grow at an annual rate of 8%
D)by waiting past full retirement age (currently 66), your payments will grow at an annual rate of 8% The maximum benefit depends on the age you retire. For example, if you started taking benefits at full retirement age in 2019, your maximum benefit would be $2,757. However, if you began at age 62 in 2019, your maximum benefit would be $2,245. If you waited until age 70 in 2019, your maximum benefit would be $3,770—that is because after age 66 (current full retirement), the benefit grows at an annual rate of 8%. Earnings don't impact Social Security payments once you've reached full retirement age, not 70. A surviving spouse or child may receive a special lump-sum death payment of $255 for burial expenses, regardless of the age at death or the age at which benefits began.
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 4-year program. You check the client's 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 4 years can provide the necessary funds. You would probably reply A)this is wonderful news and you are pleased that the client has selected such a worthwhile goal B)that the goal seems attainable if the client is willing to assume the necessary risk C)his daughter should consider attending a community college instead D)the short time horizon is an investment constraint that will make reaching this goal highly unlikely
D)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.
