Chapter 20- Investment Recommendations and Strategies Flashcards
FINRA rule 2111
A fundamental obligation of a RR is to make suitable recommendations to customers
Factors to be considered when making recomendations
Customers financial situation
investment experience
investment objectives
age
risk tolerance
Suitability Rule requires that the recomendaton always
Be in the customers best interest, not necessarily the best interest of the firm
Suitability is determined based on
when the recommendation is made
Suitability rule recommends documentation when
complex or potentially risky securities or investment strategies are being recommended
What to consider when assessing risk tolerance
Number of dependents and educational needs
Investment objectives
Net worth
Time Horizon
Market Capitalization is
The current market price per shares multiplied by the number of outstanding common shares
Market Capitalization sizes
Mirco Cap- less than 250 million
Small cap is $250 million to $2billion
Mid-cap is $2 billion to $10 billion
Large Cap - over $10 billion
Asset allocation considerations
number of years until reaching the goal
How much money will be needed
How much is able to be invested right now
How much can be invested each month
Risk tolerance categories
Conservative - preservation of principal invested in the account with minimal risk. Current income may be desired but preservation is the number 1 goal
Moderately conservative investor - Willing to accept low risk to initial principal invested in order to seek a modest level of portfolio returns
Moderate - willing to accept some risk to initial principal and tolerate some volatility in order to seek higher returns. could lose a portion of initial capital
Moderately aggressive - willing to accept higher risk, to seek high returns over time. Could lose a substantial amount of investment
Aggressive - Willing to accept significant risk to initial principal invested in order to achieve maximum returns. Could lose most or all of the money
When making a recommendation to a customer all of the following must be disclosed
If they make a market in the security recommended
if the firm maintains a position in the security
if any member of the firm is a director on the board for the company being recommended
If the firm was involved in the initial distribution of the security being recommended
Written recommendations must include
The date of the recommendation
The current value of the recommendation
That the member firm is a market maker in the security, if this is true
Does not have to include the last 12 months prices of the security
