Accounts and Clients

Question 1

In a trust, all actions of the trustee must be for the benefit of the ______________

Answer 1

the beneficiary

Question 2

Define assignment

Answer 2

The transfer of an advisory contract by the adviser or any change in the overall management of the advisory firm

Question 3

If an agent (RR) received a power of attorney seven years ago, could she still trade that customer’s account?

Answer 3

Yes, POAs do not need to be renewed

Question 4

When does a durable power of attorney become automatically cancelled?

Answer 4

At the time of death of the grantor of the POA

Question 5

What is not pertinent when opening an account, a client’s educational or financial background?

Answer 5

Educational background

Question 6

Define conversion

Answer 6

The prohibited act of an agent using client funds for personal use

Question 7

True or False: An agent must always have reasonable grounds for recommending a particular security

Answer 7

True

Question 8

True or False: Principals must approve discretionary orders prior to entry

Answer 8

False. The orders must be approved promptly afterward

Question 9

What are the contents of an estate?

Answer 9

The total assets and liabilities of a decedent

Question 10

What does it mean to say “a limited partnership is a pass-through investment?”

Answer 10

The results of the business venture (profits and losses) flow through directly to the investor

Question 11

True or False: A mutual fund asset allocation program requires a special wrap program disclosure document

Answer 11

False. These programs charge a percentage of assets to manage a portfolio of no-load mutual funds

Question 12

What is the primary purpose of forming a family limited partnership (FLP)?

Answer 12

To minimize estate tax and gift tax liabilities

Question 13

A revocable trust will eliminate __________, but will not reduce _________ tax

Answer 13

probate, but will not reduce estate tax

Question 14

What is the benefit of establishing a revocable trust?

Answer 14

It avoids probate

Question 15

Define a sole proprietorship

Answer 15

A business that is owned by one person who is responsible for all management decisions and entitled to all profits

Question 16

True or False: An adviser is required to deliver only ADV Part 2 when entering into a wrap fee program with a client

Answer 16

False. For wrap accounts, the SEC requires IAs to provide clients with a special disclosure (ADV Part 2A-Appendix 1)

Question 17

True or False: If an agent disagrees with a customer’s order, he may disregard the order

Answer 17

False. Agents and IARs must follow all customer requests, even those with which they disagree

Question 18

Define selling away

Answer 18

The execution of transactions by an associated person outside his employment with a member firm

Question 19

In which type of trust could the grantor not also be the trustee?

Answer 19

A testamentary trust, since it is established by the estate of the grantor

Question 20

A SIMPLE 401(k) may not be established by a business that has more than ___ employees

Answer 20

100 employees

Question 21

Describe a wrap account

Answer 21

An account that charges the client a single fee that covers transaction execution and account management

Question 22

What does the Partnership Agreement define?

Answer 22

The rights, liabilities, and obligations of each partner

Question 23

True or False: If a conflict of interest exists, an IA must always terminate a relationship with a client

Answer 23

False. An IA must always disclose a conflict, but they don’t necessarily need to end the relationship

Question 24

What is required to receive the tax benefits of a family limited partnership?

Answer 24

A legitimate business purpose is required. (If created solely for tax benefits, the IRS may disallow the benefits.)

Question 25

S-Corporations are not subject to _______ taxation

Answer 25

double taxation

Question 26

Is income generated by a limited partnership taxed once or twice?

Answer 26

Only once, and it is at the partner's level. The program itself is not a taxable entity.

Question 27

True or False: Tax refunds are found on a customer's cash flow statement.

Answer 27

True. Tax refunds are cash inflows (i.e. money coming into a customer's account)

Question 28

What are the different terms used to identify the individual who sets up a trust?

Answer 28

Creator, maker, grantor, donor, trustor, settlor

Question 29

What are the benefits of setting up an irrevocable trust?

Answer 29

It will reduce estate taxes and also avoid probate.

Question 30

True or False: Only one person must provide information to open a joint account

Answer 30

False. Each owner must provide information to open a joint account

Question 31

What factors are necessary to determine a person's tax status?

Answer 31

Age, marriage status, state or country of residence, earned income, and unearned income

Question 32

True or False: All corporate officers may effect transactions for the corporation.

Answer 32

False, only those named in the Corporate Resolution

Question 33

If a client wins $1 million, what should an agent or an IAR do?

Answer 33

Update the client's information that is on file

Question 34

True or False: Mortgage payments are found on a customer's cash flow statement

Answer 34

True. Mortgage payments are also found on the income statement

Question 35

True or False: The income of a C Corporation is subject to double taxation

Answer 35

True. The corporation pays tax on its earnings, with any distributions being taxed to the owners (shareholders)

Question 36

When is an inter vivos trust established?

Answer 36

During the donor's lifetime

Question 37

The earnings generated in a revocable trust will be taxed to the __________

Answer 37

the grantor

Question 38

When must a mutual fund prospectus be delivered?

Answer 38

At or prior to the time of solicitation or when marketing materials are sent

Question 39

In what type of account is reverse churning most likely found?

Answer 39

A fee-based (wrap) account

Question 40

True or False: The wrap fee brochure must disclose that it may cost less to purchase the IA's services separately.

Answer 40

True

Question 41

What document is filed with the state of legal domicile to create a partnership?

Answer 41

Certificate of Limited Partnership

Question 42

May an IAR and a client share in an account?

Answer 42

No. However, an agent may share in a client's account

Question 43

The _________ partner is in charge of management and decision-making for the partnership

Answer 43

general partner

Question 44

When does a standard power of attorney become automatically cancelled?

Answer 44

At the time of either the grantor's death or declaration of grantor's incompetence

Question 45

Describe the liability of the two partners in a limited partnership

Answer 45

General partners have unlimited liability, while limited partners have limited liability

Question 46

A ___________________ is required to open an account for a partnership

Answer 46

Partnership Agreement

Question 47

How are S Corporations treated for tax purposes?

Answer 47

S Corporations have the same flow-through treatment as partnerships (i.e., they are not taxable entities)

Question 48

The program where a single fee is charged in lieu of commissions and advisory fees is generally called a ______ program.

Answer 48

wrap program

Question 49

What are the differences between a simple and a complex trust?

Answer 49

A simple trust must distribute earnings, but not principal. Complex trusts may retain earnings or distribute principal

Question 50

The tax treatment of a limited liability company (LLC) is similar to the treatment of what other entity?

Answer 50

A Subchapter S Corporation

Question 51

If a client is reluctant to disclose information, what must an IAR do?

Answer 51

Use the information given and create a plan based on that information. An IAR may not make assumptions

Question 52

True or False: A gift made to an UGMA/UTMA account is the preferred method of funding a child's college education

Answer 52

False. The assets in an UGMA/UTMA account are owned by the child, which may reduce the eligibility for student aid

Question 53

Under the provisions of UGMA/UTMA, when does a minor obtain ownership of the assets in the account?

Answer 53

A minor is the owner at the time a gift is made, but does not gain control of the assets until he reaches legal age

Question 54

What is needed for a BD to exercise discretion over a client’s account?

Answer 54

the client's prior written authorization

Question 55

What document is required for an IAR to be authorized to pay his client's bills?

Answer 55

A full power of attorney

Question 56

What corporate structure provides flow-through tax treatment and has a P&L reported on the owner's personal tax return?

Answer 56

An S Corporation

Question 57

____________ Partners are the primary contributors of capital to a limited partnership

Answer 57

Limited

Question 58

May a wife enter trades in a husband’s account?

Answer 58

Yes, with written third-party authorization

Question 59

A client has just learned that his account will now be handled by another IAR. Is this considered an assignment?

Answer 59

No. Control of the account has not changed simply based on an IAR leaving the firm

Question 60

The __________ is the person who has fiduciary control over a trust

Answer 60

trustee

Question 61

To open any account on behalf of a corporation, what document must agents and IARs examine?

Answer 61

Corporate Resolution

Question 62

Who establishes a testamentary trust?

Answer 62

The estate of the deceased

Question 63

May an IAR recommend that a client meet/speak with another financial professional?

Answer 63

Yes. If an IAR lacks expertise in a certain area (e.g., insurance), it is acceptable to recommend outside assistance

Question 64

To whom will the earnings produced in an irrevocable trust normally be taxed?

Answer 64

The trust

Question 65

What business structure does not provide for flow-through tax treatment?

Answer 65

C Corporations

Question 66

An agent encourages a customer to buy a stock due to an upcoming dividend. Is this a legal practice?

Answer 66

No, this is a prohibited action known as selling dividends.

Question 67

What duties does an IAR have according to the "know your customer" rules?

Answer 67

Make a reasonable inquiry into a customer's background and provide suitable advice based on known information

Question 68

To invest in a limited partnership, an investor must complete the _____________ __________

Answer 68

Subscription Agreement

Question 69

In a limited partnership, which partner has unlimited personal liability and which has limited liability?

Answer 69

General partners (GPs) have unlimited liability, while the limited partners (LPs) have limited liability

Question 70

When investing for an estate, the most suitable investments are normally _______-term

Answer 70

short-term

Question 71

True or False: The amount left on a mortgage is found on a customer's cash flow statement

Answer 71

False. That would be a liability on the balance sheet

Question 72

An irrevocable trust will eliminate __________ and will reduce _________ tax liability

Answer 72

probate and will reduce estate tax liability

Question 73

An agent advises a client to buy stock of a company that just fired its CEO. Is disclosure to the client required?

Answer 73

Yes, since this is a material fact, it must be disclosed before the customer buys the stock

Question 74

Will a client always pay lower fees in a wrap account?

Answer 74

No. Depending on the frequency of the client's trading, he may ultimately pay more than if the fees are paid separately

Question 75

A limited partnership could be formed by a minimum of how many individuals?

Answer 75

Two (one general partner and one limited partner)