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Client Recommendations > Customer Recommendations > Flashcards

Customer Recommendations Flashcards

1
Q

Churning

A

Is A Prohibited Practice

Excessive transactions. An advisor doing excessive transactions with clients accounts not for the benefit of the client but rather to increase commissions

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2
Q

Reverse Churning

A

Is A Prohibited Practice

Taking a customers account that doesn’t trade very much and putting it in a fee based account to get more commissions on it and its not in the clients best interest

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3
Q

Capping

A

Is A Prohibited Practice

trying to keep a stock price down

Ie: entering in a large amount of sales orders before the end of the trading day to decrease the stock price

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4
Q

Pegging

A

Is A Prohibited Practice

trying to keep the stock price high

Ie: entering in a large number of buy orders before the end of the day to increase the stock price

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5
Q

Front running

A

Is A Prohibited Practice

Placing a firms order before a customers order

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6
Q

Trading Ahead

A

Is A Prohibited Practice

Placing a trade just before the release of a research report (while knowing information about the report before its released)

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7
Q

Painting the Tape

A

Is A Prohibited Practice

(matched purchases / matched sales / washed sales)

Buying and selling stocks multiple times to people who are in the loop with you to try and create false activity in the stock in order for it to look active.

Ie: two people sell the stock back and forth to each other to try and make the stock activity look good.

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8
Q

Unauthorized Trading

A

Is A Prohibited Practice

A person cannot execute an order for a client without written discretionary authority. If they don’t have it they must first consult the client

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9
Q

Fraud

A

Is A Prohibited Practice

The intentional deception of a client or another party fort he purpose of gaining a material advantage over that person

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10
Q

Blanket Recommendations

A

Is A Prohibited Practice

Each person has different investment objectives and so you cant give every person the same exact recommendation

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11
Q

Misrepresentations

A

Is A Prohibited Practice

Misrepresenting your or your firms qualifications, recommendations, research department, trading team, customers account status, misquote a stock. Etc…

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12
Q

Omitting material facts

A

Is A Prohibited Practice

Omitting facts that a person would need to know in order to make an educated investment decision

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13
Q

Guarantees

A

Is A Prohibited Practice

No registered person may make any guarantee of any kind. The only guarantees in this industry are from:

i. The US government
ii. An Insurance company
iii. A parent company guaranteeing the obligations of a subsidiary
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14
Q

Rules of Giving Recommendations

A

Must be suitable

Must meet clients investment objectives.

You cannot recommend 2 funds with different investment objectives
Ie: a growth fund and an income fund

When referring to your past recommendations you must provide all your past recommendations not just the good ones

Fair dealing with customers- you must treat them all fairly not lying cheating or stealing

Institutional customers: the advisor can recommend anything and it is assumed that the institution can decide for themselves if it’s a good investment or not. This is because they are a larger sophisticated investors.

If the institution clearly doesn’t know what they are talking about then it is up to the advisor to make good decisions and recommendations for them.

When recommending Mutual Funds
If you want to make a statement regarding a certain funds yield:
1) Must be based on dividends only. It cannot contain capital gains
2) The public offering price must use the highest sales charge provided by the fund. You cannot use a lower sales charge that is based upon a lower breakpoint.

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15
Q

Disclosure of clients information

A

cannot disclose client information without client approval or without a court order. A 3rd party in not allowed in unless the client approves in period.

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16
Q

Borrowing and lend money

A

an advisor may borrow money from a client if:
○ They are a close family relative
○ They have a personal relationship and that is the basis of the loan
○ If they are an institution that is in the business of providing loans (ie: you have a bank as a client)
○ From a person that is registered at the same firm if the firm allowed it and the firm supervised the repayment

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17
Q

Customer Complaints

A

Must be on retention for 4 years. (Must be on file for 4 years)

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18
Q

Quarterly Electronic Reporting

A

15 days

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19
Q

Gifts and Entertainment

A

Max Value of $100 per person per year. Awards and plaques and occasional meals and entertainment etc… are excluded

The only way more than that number would be acceptable is if the person giving the gift/ entertainment goes with them. If they become ill then someone else from their firm should go instead.

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20
Q

Brokercheck

A

All broker dealers are required to provide this to customers annually

Must be provided to a customer at least once per year FINRA reports Disciplinary actions through form U6. It contains:

- Current employer and 10 years of employment history
- legal and regulatory actions
- pending customer arbitrations settled or awarded $10k
- Sales practice violations -$5k
- Civil and Criminal Investigations
- Terminations for cause
- Dispute via broker check comment form
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21
Q

New Products

A

Firms must have a reasonable basis for why they are providing certain products for their customers. Then they must also train the proper people in their firm about the performance and risks of that security.

A firm’s obligation begins when the registered person speaks to the person about security. At this point, the suitability responsibility should be there.

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22
Q

Social Media

A

Firms must monitor any social media used for business purposes by anyone within their firm and those registered individuals need to act in an ethical manor and bend the truth. Firms can use a library of preapproved social media posts that they can allow to be used.

Social Media becomes a Recommendation when…
=> the post is talking about a specific product.

A broker-dealers website and everything contained on it must be preapproved and anything that gets changed on it must be kept for 3 years

If a registered person enters a chat room or a blog then they enter a “public appearance”

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23
Q

Outside Employment

A

Registered individuals must get permission from their firm. The firm can say no or yes.

24
Q

Selling Away

A

Recommending products or services that your firm doesn’t transact business in. DON’T DO IT.

YOU SHOULD ONLY SPEAK TO CUSTOMERS ABOUT PRODUCTS THAT MEET THEIR SPECIFIC RISK PROFILE NEVER SPEAK TO THEM ABOUT ONE THAT DOESN’T.

25
Q

Private Securities Transactions

A

Rep is helping a private business raise money

ie: one of your friends if a chef and he is given the opportunity to buy the restaurant he works in. he tells you about it and tells you he doesn’t have enough money and asks for help raising money for the restaurant.

If the rep is going to do then:
IF - he is going to get paid to help that friend raise money, then he must speak to his firm and they will give him an approval.

IF - the person doesn’t help them raise money but provides some of the money the firm doesn’t need to approve that.

IF the rep just receives free drinks and occasional checks then they don’t need to tell form

IF they are bussing tables and washing dishes basically being an employee then they need to tell their firm.

26
Q

Investment Taxable Events

A

1) Sells a security (unless bought and sold at exactly the same price)
- Methods of sale for tax purposes:
- FIFO (first in first out)
- Shared ID
- Average Cost
- Deduction capital Losses $3k from ordinary income (per year until its exhausted)

2) Receives a dividend

27
Q

Inheriting and gifting securities

A

Inherited cost base FMV (fair market value) on date of death

Gifting: Is the FMV on the date of the gift or the gifting cost base whichever is lower

Donating: they would get the deduction on their taxes of whatever the FMV is when they sold it (its only if its given to a charity)

28
Q

Know your customer

A 
Inquire as to the customers:
	- Investment objectives and experience
	- Financial Status / Income
	- Tax Bracket
	- Current Investments
	- Expenditures - current and future
	- Attitude toward investing
	- How old are you?
	- Are you married?
	- Do You have children?
	- How long have you been at your current job?
	- Are you planning to retire? When?
Ask these questions to find out this type of information
29
Q

Investment Recommendations For Income Objectives

A
  • Corporate Bonds
  • Preferred Stock
  • Bond Funds
  • Preferred Stock Funds
30
Q

Investment Recommendations For Growth Objectives

A
  • Common Stock

- Stock funds

31
Q

Investment Recommendations For Safety Objectives

A

!!!You want whatever the highest rated shortest term Debt Securities are in the answer key!!!

  • T Bonds, T Notes, T Bills
  • Highly rated Corporate and Municipal Bonds
  • Money Market Funds (safest of all)
32
Q

Investment Recommendations For Liquidity Objectives

A
  • Money Market Funds (#1 pick)
  • Common Stock
  • Mutual Funds
33
Q

Investment Recommendations For Tax Relief Objectives

A
  • Municipal Bonds

- Municipal Bond Funds

34
Q

Investment Recommendations For Speculation Objectives

A

(customer who wants high risk high reward potential)

  • Penny Stocks
  • Junk Bonds
  • Small-Cap Stocks
35
Q

Capital Risks

A

the risk you will loose your money

36
Q

Market Risk / Systematic Risk

A

Risk that the market as a whole declines not just that stock. Even if you are diversified you will loose (Not specific to one industry or company)

37
Q

Non Systematic Risk

A

Customer only has one investment and loses because they are not diversified (specific to one company or industry) - you can avoid this risk with diversification

38
Q

Legislative Risk

A

the risk the government does something that negatively impacts your investments

39
Q

Call Risk

A

the risk that as interest rates go down investors will call in their investments early leaving you to find a new investment usually at a lower rate

40
Q

Reinvestment Risk

A

Investor loses because they may not be able to reinvest principal or interest at the same rate they were receiving

41
Q

Credit Risk

A

an investor loses because they invested in fails (only for debt securities)

42
Q

Timing Risk

A

An investor loses because they buy high and sell low

43
Q

Liquidity Risk

A

An investor loses because they cant buy or sell fast enough

44
Q

Beta

A

Measures the relative volatility of a security to a market as a whole.

The market has a beta of 1 and if a stock is higher than 1 then its stock moves more quickly as the market as a whole.

Ie:
S&P 500	Stock A	Stock B
Beta=1	Beta=1.5	Beta=.8
Return +10%	Return +15%	Return=+8%
If the stock goes up 10% in a year then it is reasonable to assume that in any year it can drop 10% as well. Greater returns mean greater volatility.
45
Q

Alpha

A

The relative outperformance of a portfolio compared to the market given the same amount of risk

Ie:

S&P 500 Stock A
Beta=1 Beta=1
Return 8% Return +10%

The investor performed better than the market while maintaining the same amount of risk

46
Q

Capital Asset Pricing Model (CAP-M)

A

Assumes all investors are risk-averse (they don’t like to take risk)

the greater your risk = lower pricing in the market and greater potential return

If there is more risk then there needs to be more reward for it to be worth it.

47
Q

Revocable Trust

A

the assets can be taken back by the grantor or person that put them in the trust
Irrevocable - the assets cant be taken back by the grantor (the person who puts the money in there)

48
Q

Simple Trust

A

All income must be distributed to beneficiaries in the year that it comes into trust

Complex - The income in the trust may remains in the trust and become part of the principle in the trust

49
Q

Inter Vivos Trust

A

The grantor was alive when they created the trust

Testamentary - The grantor was dead when they made the trust

50
Q

By Pass / Generational Skipping Trust

A

Designed to pass assets to beneficiaries further than on generation away

51
Q

Grantor retained Annuity Trust

A

the grantor retains an income interest in the assets within the trust while they are alive and the remaining assets are to be distributed to beneficiaries upon grantors death

52
Q

Totten Trust

A

Established at a bank. Basically says in the event of my death this is the person I want to receive my assets here at your bank

53
Q

Sole Proprietorship

A

an extension of an individual acting in the name of a business rather than an in themselves. He is still liable

54
Q

C Corp

A

established when someone expects a large amount of revenue and they want to pay taxes at their own rate (pull money out of corp at their own rate).

Ensures limited liability.

If you took dividends as the owner of a C Corp it would be subject to double taxation.

55
Q

S Corp

A

Allow for the flow-through of income to shareholders.

Would be set up to provide liability protection but still flow the income through to the individual.

Max of 100 people as shared holders

56
Q

Family Limited Partnership

A

used to transfer assets from one family generation to another without major tax issues.

57
Q

LLC

A

Owners are known as members not shareholders

Protects assets/ liability

provides pass-through of income to members

Client Recommendations (3 decks)

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