Client Recommendations and Investment Strategies Flashcards
Types of Clients
- business entities
- trust accounts
Business Entities
- sole proprietorship
- LLC
- General partnership
- S corp
- C Corp
- Limited partnership
Which business entity profits does not flow though to owners
- c corp (taxed at business level) has double taxation
Ranking Ease of formation
- Sole proprietorship
- LLC
- S corp
- General Partnership
- C Corp
Ease to Liquidate
- C Corp is the easiest to liquidate
Trust Accounts
- living trust
- testamentary trust
- simple trusts
- complex trusts
Living Trust
- must be formed while alive
Testamentary Trust
- only created after death
- based on clients will
- contact executor (handles the will)
Simple Trust
- must distribute income annually
- taxed annually
Complex Trust
- may accumulate income
- taxed only when there is a distribution
Settlor/Grantor
- provides assets to the trust
- can be trustee or beneficiary not required
Remainderman
- heirs of beneficiaries
Per Stirpes
- heirs split original allocation
Per Capita
- reallocation of the original allocation
Trust accounts with multiple beneficiaries handling
- based on stated objective in trust agreement (prudent man rule)
Tax Form for Trusts
Form 1041
Individual Balance Sheet
- Assets - Liabilities = net worth
- assets (properties, cash, investment accounts, retirement accounts, jewelry etc)
- liabilities (mortgages, consumer debt, car loans etc)
Statement of Cash Flow
- inflows: salary, rental income, investment income
- outflows: taxes, bills, expenses, payments
Most important information when making a suitable recommendation
investment objectives (this also counts as non-financial information)
Answering Client Recommendations Questions
- always look for stated investments objectives
- if safety: US gov, Money market
- income: corporate bonds, reits, preferred stock
- growth: common stocks (longer time horizon)
Time Horizon
- length of time until death (in retirement)
- life expectancy
Capital Market Theory
- CAPM (risk vs return)
- efficient market hypothesis
- modern portfolio theory
Efficient Market Hypothesis
- all markets are efficient and information is already effected in price
- weak (least amount known, price/volume, fundamental analysis helps)
- semi strong (only insiders can out perform, all public information is known)
- strong (all public and private insider information is known)
Modern Portfolio Theory
- diversification of different asset classes to maximize returns based on risks
- more risk is greater return.
- efficient frontier (optimally efficient portfolios)
Portfolio Management Styles
- strategic vs tactical
Strategic Management styles
- asset allocation
- rebalancing
Tactical Management Strategies
- investments based on current market conditions
- market timing
Buy and Hold
- very low expenses
- very tax efficient
- passive
- least appropriate for wrap accounts
- NOT STRATEGIC
Growth Style
- growth of sales and profits
- growth of earnings and growth of earnings momentum
- higher P/E (20+)
- low dividend payout or none at all
Value Style
- stable earnings
- low P/E
- higher dividend payout ratios
Diversification
- negative correlation (lower means more diverse) - reduces overall risk of portfolio
- on chart look for correlation coefficient (look for lowest number)
- international stocks are not perfectly correlated with domestic securities
Sector Rotation
- tactical style
- rotate during business cycle
- cyclical = buy at trough
- non-cyclical/defensive = peak to recession
Dollar Cost Averaging
- invest the same amount on a regular basis
- finding average price (add all up divided by number of occurrences)
- finding average cost (find number of shares divided by total money put in)
Traditional vs Roth IRA
- traditional IRA vs Roth IRA (can only contribute with earned income)
- traditional IRA (tax deferred, can be deductible from taxes, 10% penalty exceptions, RMDs @ 73)
- Roth IRA (tax-free, not deductible, 10% penalty exceptions, no RMD, can contribute after 73 with earned income)
What can be invested in an IRA
- NO life Insurance
- NO muni-bonds, inappropriate due to tax status
- YES to Gold Coins minted by US and US only
- YES only if business property (cannot be for personal use)
Tax-exempt co./org or nonprofits Retirement Plan
- 403(b)
City Fireman Retirement Plan and other Government workers
- 457 plan
Defined Benefit vs Define Contribution plan
- DB - based on average salary last 3 years, benefits older employees
- DC - based on percentage deferred from own salary, benefits younger employees
Money Purchase Plan
- profit sharing
- mandatory contributions from company
- not mandatory from employee
QDRO
- divorced, separate retirement assets (qualified only)
- payee (ex spouse) still taxable upon withdrawal but no 10% early withdrawal penalty
Retirement Plan Taxes
- taxed as ordinary income
- includes variable annuity
AGI
- pre 2019 divorce
- child support is never
Inherited Shares
- stepped up to market value at death
- if gifted, gift original costs
- alternative death value - 6months after as long as estate taxes are paid within 9 months
Gift Tax
- the one giving the gift pays the tax
ERISA
- governs private sectors (corporations)
- no government retirement plans
- minimum of 3 retirement selections
- eligibility, 21 and 1000 hours in past 12 months
- require Summary Plan documents
Investment Policy Statement
- not required but is good business
- do not confuse with summary plan document (required by law)
- does NOT note individual security selection criteria
IA has fiduciary duty
- to plan participants
- IA provide plan participants of IPS
Summary Plan Documents
- Required by Plan Sponsor
Special Accounts
- JTWROS - find with spouses
- TIC
- Totten Trust
- 529 plans
JTWROS
- avoids probate
- passes to survivor
TIC
- non-spouses typically
- probate
- percentages pass through to that persons estate
- undivided shares
Totten Trust (POD(same as TOD))
- retain access while alive
- passes at death
529 Plans
- donor retains Control (UT/GMA is not like this)
- grow and can be used tax free for education but tax deferred otherwise
- may use to go back to school or for sons medical school > indicates desire for control
Coverdell
- max contribute $2k per child
- can revoke, donor contains control
UTMA/UGMA
- one custodian to one child (1:1 is only way)
- limit is unlimited (taxable after gift tax exclusion)
- donor is responsible for gift tax
- reregister in child’s name at age of majority
- all gifts to UGMA/UTMA are irrevocable
- child has control
- UTMA is legal age up to 25
Trading Securities
- exchange - must be listed on exchange
- over the counter
Trading Listed Securities
- specialist/ designated market market
- at exchange on floor bringing buyer and seller together
- customers buy at ask (offer) and sell at bid, always buy at higher price.
Over-the-Counter
- unlisted
- trade through network of BDs
- BDs register with FINRA to maintain market (updates prices through NASDAQ)
- market maker (best describes as a BD who buys unlisted securities, OTC)
Market Order
- no specifications
- immediate sell
Limit Orders
- specify a price to sell/buy
Stop Orders (if/then)
-if/then (preventative measure)
Follow these 3 steps:
1. Does customer own/want to own? Own = sell, want to own = buy
2. Market attitude? Bearish or bullish
3. SL - CMV - BS
BL - CMV - SS
SL and BS are above CMV
BL and SS are below CMV
Long Stock Hedge
- buy put
- sell call
Short Stock Hedge
- buy call
- sell put
Constraints
- personal values
- taxes
- time horizon
- health changes
- need for liquidity
Objectives
- preservation of capital
- current income
- education
- retirement
- risk tolerance
- growth of capital
- tax planning
- speculation
Recommendations: Preservation of Capital
- Money Money funds and securities
- certificates of deposits (CDs)
- treasury securities
Recommendations: Current Income
- Bonds
- bonds funds
- Equity Income funds
Recommendations: Capital Appreciation
- common stock and common stock mutual funds
- REITs and DPPs
Recommendations: Liquidity
- money market funds and securities
- cash
- demand deposits
- treasury securities
Recommendations: Speculation
- DPPs
- commodities
- futures and options
- high yield bonds
- precious metals
- sector funds
Recommendations: Tax Advantaged
- municipal bonds
- municipal bond funds
- tax advantaged DPPs
