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Vi > Client Recommendations and Investment Strategies > Flashcards

Client Recommendations and Investment Strategies Flashcards

1
Q

Taxation of each type of client

A

Sole - flow through
GP - flow through
S corp - flow through
C corp - Entity files taxes (business & owner level if distribute dividend- so it could be twice)
LLC - flow through

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1
Q

Liability of owner for each type of client

A

Sole - full
GP - full
S corp - limited
C corp - limited
LLC - limited

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2
Q

Ease of formation

A

In order -

Sole -
LLC -
S corp -
GP -
C corp -

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3
Q

Easy of liquidation

A

C corp - easiest (own shares, sell shares)

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4
Q

Trust accounts
Living vs
Testamentary vs
Simple vs
Complex

A
  • Living trust - must be formed while settlor is alive
  • Testamentary trust - ONLY created once client dies, based upon instructions of client will, you would contact EXECUTOR/ADMINISTRATOR
  • Simple trust - MUST distribute income annually, TAXED annually
  • Complex trust - May accumulate income, taxed when distribution
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5
Q

Settlor/Grantor

A

Provides money to trust
They can also be beneficiary, grantor, trustee

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6
Q

Remainderman

A

Heirs of beneficiary

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7
Q

Per stripes

A

Heirs split original allocation
Per capita it is then split among others seperately

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8
Q

Per capita

A

When it splits the allocation depending on the beneficiary passing

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9
Q

Trust account w/ 2 named beneficiary’s, how do they manage it?

A

Based upon stated objective in trust agreement. All trust agreement have stated objective.

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10
Q

Tax form for trusts

A

1041

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11
Q

Balance sheets for clients (individual) & the difference between assets and liabilities

A

Asset - liabilities = net worth

Asset
- property of all types
- investments
- investment accounts
- retirement accounts
- cash
- jewelry

Liability (total amount of debt)
- mortgages
- consumer debt / revolving credit / credit cards
- car loans

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12
Q

Statement of cash flow for clients (individuals)
(monthly cash flow / money in money out)

A

Income: Salary, rental income, investment income
Out go: Taxes, Bills, Utilities, Mortgage Payments, CC payments

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13
Q

Most important information in making a suitable reccomendation?

A

Investment objective, it may include risk, age, salary, etc – these are sub to the INVESTMENT OBJECTIVE.

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14
Q

Always look for the (insert) when making recommendation, and ignore the NOISE

A

INVESTMENT OBJECTIVE

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15
Q

If the goal is to provide income

A

Corp bond, pref stock, REIT

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16
Q

If the goal is for growth

A

Common stocks

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17
Q

57 yr old husband, 58 wife, he wants to retire at 62, her at 65… They will ask you, what is their time horizon?

A

20 ish year, life expectancy, not just their retirement. You would WANT to include some stocks right? Hedge against inflation for example. Even at retirement you will still want to include stocks.

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18
Q

Capital Market Theory

What is it? What are pieces to the formula?

A

CAP M
Capital Asset Pricing model

The pieces of the CAPM formula are the risk-free rate (Rrf), investment beta (βa) and the market return (Rm – Rrf)

= Risk vs Return
Greater returns you have greater risk

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19
Q

Husband and wife looking for above average returns, according to CAP M, which is true..
- Must be comfortable with risk
- No risk tolerance
- Somewhat comfortable with risk
- (something else)

A

Must be comfortable.

Higher return than average.. Not somewhat.

(think about this conceptually)

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20
Q

Efficient Market Hypothesis

A

Markets are efficient in that information is already reflected in the investments price. No special analysis will allow you to achieve better than average returns.

Hypothesis works best with MORE information that is known. It is BASED ON HOW MUCH INFORMATION IS KNOWN. Least amount of information would be price & volume.

Stronger with more info, I.e. financials of the company (public info), STRONGEST and therefore analysis is LEAST Valuable when PUBLIC information AND PRIVATE information.

Private doesn’t have to be inside information, knowledge known to insiders is private info.

3 levels
- strong
- semi strong
- weak

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21
Q

Modern Portfolio Theory

A

Diversification through different asset classes & maximize returns.
Greatest amount of a return, portfolio mix of 100 equity stocks.
More risk - 70% equity and 30% income
Less risk - 20% equity and 80% income

THE CURVE on the graph of risk / reward is the EFFICIENT FRONTIER

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22
Q

Strategic vs Tactical

A

Strategic - long term
- 70/30 for example, however is not buy and hold, must rebalance.
- Strategic portfolio - what you’re looking for ASSET ALLOCATION & REBALANCE.

Tactical - shorter term
- Investment decisions based on current market conditions / market timing
- Market timing

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23
Q

Buy and Hold

A
  • Consider this to be a completely diff style from Strategic & Tactical
  • Very low expenses & very tax efficient
  • Very similar to a ‘passive’ style
  • LEAST appropriate for WRAP ACCOUNTS, why would you charge someone an annual fee when you’re not making changes???
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24
Q

What best shows buy and hold
Tactical
Strategic
Passive
(insert)

A

PASSIVE (not strategic)

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25
Q

Growth vs Value

A

Growth
- growth of company profits, which LEADS to the growth of stocks
- earnings momentum for the company as earnings get larger and larger
- stocks will have a high PRICE TO EARNINGS multiple
- Plowing their earnings back into growth of company and pay very little to no dividends.

Value
- Stable earnings, low PE, and higher dividend payout ratio’s

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26
Q

Most diversification?
1. domestic stock & int stock
2. blue chip and large cap
3. gov bonds and muni bonds
4. converable bonds vs corp bonds

A

Look for NEGATIVE COOROLATION

US stocks vs international stocks would be the right answer, they are not directly correlated

Blue chip and large cap are the same things

27
Q

When asked about which portfolio represents most diversification, and giving you a bunch of alpha, beta, SD, and coorolation coefficient…

A

LOOK FOR THE COOROLATION COEFFICIENT.

Look for the one with the greatest negative if you’re looking for which has the most diversification

28
Q

DCA

A

Dollar Cost Average - invest same amount on a regular basis.

29
Q

What can you put into IRA

Life insurance
art collection
muni bond
gold coins US minted

A

Muni doesn’t make sense - tax benefit already
Life insurance and art collection you can’t
You CAN GOLD COINS US MINTED

30
Q

Can you put RE in IRA
Primary residence,
vacation,
secondary home,
business property,
time share

A

Business property
Can’t be personal use

31
Q

Roth IRA

A

Tax def not tax free
Not deductible
Penalty early withdrawl
No RMD, can contribute after 70.5 if working w/ earned income

32
Q

Tax exempt company (organization)
What type of retirement plan should they set up?
401k
403b
457
HR10

A

Tax exempt - 403b

33
Q

City fireman, what would you reccomend

A

457, government employee

34
Q

Defined benefit vs defined contribution

A

Defined benefit
- older employers
- % of salary, usually average salary over last 3 years
- longer you’re there higher the salary higher the benefit

Defined contribution
- 401k for example, more modern
- based on how much you put into it
- deferred from own salary
- benefit younger employees

35
Q

Money purchase plan

A

Profit sharing plan
If the company has one, it is MANDATORY for company to contribute
NOT mandatory for employee to contribute to it

36
Q

QDRO

A

What happens when you get divorced and separate retirement plans, usually qualified plans. Alternative Payee, ex spouse, who is receiving assets it is still taxable upon withdrawal, but there is NO 10% early penalty

Distributions taxable, but no penalty for early withdrawl

37
Q

Retirement plans in general

A

Upon distribution, TAXED as ordinary income, (401k, 403b, variable annuity, etc).

38
Q

Apart of your AGI (adjusted gross income)

A

Alimony is included

Child support is NOT part of it, that is for child

39
Q

inherited stock

A

if passed on before death, this would be a gift, cost basis would be what she paid for them.

if passed on after death, shares inherited you get step up in cost basis to market value at day of death.

Generally, you should not gift while still alive.

40
Q

When do value estate for tax purposes

A

At date of death

OR

Choose to wait 6 months

We get to use, lower of the 2, whichever one is favorable.

STATE taxes MUST be paid within 9 months.

41
Q

Gift tax

A

gifts > $15k
gifts greater than $15k

The one giving the gift pays the tax, not the reciever

42
Q

ERISA guidelines (employee retirement)

A
  • private sector (corporations) (not gov’t plans)
  • Minimum of 3 investment selections
  • eligibility 21 yr old and minimum 1k hours past 12 months
43
Q

IPS (investment policy statement)

A
  • Is it required? NO, it is not. Just good business if you do it.
  • It INCLUDES summary plan document
  • The fudiciary is to the planned participant if the corporation uses an IA alongside retirement plans for employees.
  • Individuals Securities selection criteria is NOT find in IPS (TESTABLE QUESTION
44
Q

JTWRDS (special account)
vs
JTIC

A

JTWRDS
- For spouses
- Avoids probate

JTIC (joint tenant in common)
- for non spouse (brother and sister, each of whom are married that want to open an account, but if one of them die, they want their portion of asset to go to their estate for family)
- You do have to specify percentage of ownership because of this, how much of the asset gets transferred

45
Q

Grandpa wants to leave asset to grandson, but wants access to assets while alive, what to do? UTMA or UGMA or Trotten Trust?

A

Trotten Trust / POD (payment on death)
- Old bank term
- Only when dies, assets are transferred

46
Q

529 plans vs Coverdell

A

College savings
Donor retains control of assets, not irrevocable
Grow tax free & can be used tax FREE if used for education
No age limit to use for education either, use for themselves for grandkids, kids, etc
if not used for school, pay taxes on it
Primary or secondary education

Coverdell
- max is 2k a year
- max amount is 5x gift tax in any 5 year period
- Primary or secondary education

47
Q

UTMA and UGMA

A

irrevocable

48
Q

Jane doe is custodian for benefit of Suzie UGMA in Washington

What age may they register account soley in Suzie age?

A

Social security number used is for the minor child
Can only be used 1 donor 1 beneficiary
Limit under UGMA is there is NO LIMIT
Irrevocable
Donor pays gift tax > $15k

Age of majority (legal age, whatever that is in which state), can’t put a number to that.

When Suzie becomes legal age and takes the assets, donor CANNOT take the money back. That is why these have fallen out of favor.

49
Q

UGMA vs UTMA

A

UTMA - designate legal age UP TO 25
UGMA - Age of majority

50
Q

Every security has a 2 sided quote - listed security on exchange with a specialist (DMM)

(customers buy at what? and sell at what?)

A

Customers buy @ at the ‘ask’ (offer) & sell to bid.
Customer buy the ask & sell at the bid.
Customer buy the ask & sell at the bid.
Customer buy the ask & sell at the bid.

51
Q

Unlisted security, how do you trade

A

OTC - Over the counter

52
Q

Specialists are to
Market maker are to

A

Specialists (DMM) are to listed exchange
Market maker are to unlisted. Market makers continuously upload information NASDAQ, hardwire into NASDAQ, find them and then do the trade for over the counter.

53
Q

Which of the following best describes market maker
1. BD buy or sell listed securities on exchange
2. Underwriter
3. BD buys or sells unlisted securities OTC
4. NASDAQ subscriber

A
  1. BD buy or sells unlisted securities

1 - would be a specialist

54
Q

Market order

A

Filled immediately at current market price

55
Q

Limit orders

A

specify a price

56
Q

Stop orders
Explain options above market value or below existing market value

A

If the market does something, THEN I want to buy/sell
If/then scenario
1. Does the customer currently own the stock, or do they want to? This tells you what they would want to do with it. If they have it, it would be to sell
2. Customer market attitude, bearish or bullish
3. SL BS (above line - above market value) & BL SS (below line - bearish below market value)
(SLOBS and BLISS)
Sell Limits and Buy Stops & Buy Limits and Sell Stops

57
Q

Customer has a large gain in XYZ stock and fears a correction. What stop order?
1, Buy limit
2. Buy stop
3. Sell limit
4. Sell stop

A
  1. Owns stock
  2. Bearish
  3. Sell stop
58
Q

Current Yield

A

Annual interest income / market price

59
Q

Total return

A

Income (Interest or Dividends) +/-Gain or Loss / Cost Basis

60
Q

Tax Equivalent Return (net return)

A

Tax Free Return
(Municipal Bond) / (100% -Tax Bracket %)
Corp. Bond Yld. X (100% - tax bracket %)

61
Q

Inflation Adjusted Return (Real Return)

A

Total return

62
Q

Sharpe Ratio (risk adjusted basis)

A

Annual return – Risk Free Rate / Standard Deviation

63
Q

NAV per share

A

Assets - fund expenses / # of outstanding shares

64
Q

Rule of 72

A

determine how long an investment will take to double

72 / annual rate = # of years of doubling
or
72 / # years of doubling = annual rate

65
Q

Gross Margin %
Gross Profit (Income Statement)

A

Margin % = Revenue – COGS / Revenue
Gross profit = Sales – COGS

66
Q
A

Vi (31 decks)

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