Final #1 Flashcards
The Prudent Investor Act states that the trustee should consider what items when making investment decisions relevant to the trust or its beneficiaries?
- General economic conditions;
- inflation or deflation;
- tax consequences
- The role that each investment plays within the overall trust portfolio;
- The expected total return;
- Other resources of the beneficiaries;
- Needs for liquidity, regularity of income, and preservation or appreciation of capital
- An asset’s special value to one or more of the beneficiaries
What is it called when two relatively high income taxpayers get married and pay more on an MFJ return than they did separately as single?
The marriage penalty
True or False: Contributions to any education savings plan are not federally tax deductible.
True. This includes 529’s, Coverdells, and UGMA accounts
What is rule IA-1092?
Rule that specifically names advisers to entertainers and athletes as investment advisers that must register.
What is the excludable amount from gift tax limit on a gift in 2018?
The first $15,000 of a gift
What is the gift and estate tax cap?
40%
What is the same as the Internal Rate of Return?
Yield to maturity on a bond
How does one tell from a listing of fund prices which fund MUST be closed end?
If the purchase price (POP) if at a discount to NAV.
What must happen when the investment performance of each asset class varies from the anticipated rate of return?
the portfolio must be rebalanced by liquidating portions of over-performing classes and investing the proceeds in underperforming classes
What are the characteristics of Class A shares?
Class A mutual fund shares charge a 1-time up-front sales charge reduced by breakpoints for larger dollar purchases. They also usually have no annual 12b-1 fees
What are the characteristics of Class B shares?
Class B shares have no up-front sales charge. Instead, they charge a redemption fee if they are redeemed within the first 7 years, with the fee declining each year. Once the fee becomes “0,” they typically convert to Class A shares. This is a benefit because they charge an annual 12b-1 fee of around .50%. Once they convert to Class A shares, no more 12b-1 fees are charged.
What are the characteristics of Class C shares?
Class C shares have no up front sales charge and no redemption fee. Instead, they charge a level annual 12b-1 fee, typically around .75%.
The potential to earn interest on money which affects its relative value is known as the:
Time Value of Money (TVM)
What are the 3 main accounts that avoid probate among the owner’s death?
I. Totten trust
II. JTWROS
III. Transfer On Death
What happens to the rate of return calculation on a non-callable bond if the rate of interest stays the same and the time intervals shorten?
The rate of return increases.
For example, assume that a 10% bond will pay interest semi-annually, instead of annually. At the end of each 6 months, $50 of interest will be received, instead of receiving $100 every 12 months. Because the first $50 interest payment received can immediately be reinvested over the next 6 months until the second $50 payment is received, this will produce a higher rate of return than receiving the $100 payment at the end of the year
How must material changes made by an Investment adviser be reported?
- File an ADV Parrt 2A with the Admin. in 30 days
- provide the amended ADV Part 2A or a brochure to its new clients
- provide the amended ADV Part 2A or a brochure to its existing clients at year end
What is the formula for the equivalent tax-free yield of a security?
Taxable Yield x (100% - Tax rate)
Tax free yield calc. = happiness multiplied (no taxes!!)
What is the formula for the equivalent taxable yield of a security?
Taxable yield / (100% - Tax rate)
Taxable calc. = happiness divided (paying taxes :/)
If an investment adviser wishes to take custody of client funds or securities, the IA must:
- Notify the Administrator in writing on Form ADV that it has, or may have, custody;
- Custody must be kept by a qualified custodian in a separate account under each client name; or in accounts that only contain client funds and securities, held in investment adviser name as trustee for the clients
- Prompt notice must be given to the clients in writing of the qualified custodian’s name, address, and the manner in which the funds or securities are maintained;
- Account statements must be sent at least quarterly to clients
- The IA must be audited annually on a surprise basis to verify all customer funds and securities positions.
Are pension payments received by a retiree taxable (included in AGI)?
Yes. Pension payments received are taxable
When can the executor of an estate subject to federal estate tax be permitted to use an alternate valuation date?
For securities that have DE-preciated after the date of death, the executor can use a value that is 6 months from the date of death.
What is the basic rule for transferring inherited securities at the donor’s death?
They are transferred at FMV
The IRS requires that when an IRA account is left to a beneficiary, the distribution period is based on what time period?
If distributions have not commenced, the payout from the account must be made based on the life of the “designated beneficiary”. This is the beneficiary with the shortest expected life; or alternatively, the distribution can be made over a 5-year period
An investment adviser that claims that it is a “fee only” adviser could be compensated based on:
- a percentage of assets under management
- a flat annual or hourly fee for all work performed for investors
- a performance based fee for wealthy investors
NOTE: IA’s can never be compensated with 12-b1 fees. (BD only)
What are the deductions that are allowed for Regular income taxes, but NOT alt. min. tax (AMT)?
These are not allowed in the AMT calc:
- Personal exemption
- state & local taxes paid
- misc. itemized deductions (tax prep fees, etc.)
- No standard deduction
When are medical expenses allowed to be deducted from regular tax and AMT, respectively?
Regularly - Exceed 7.5% AGI
AMT - Exceed 10% of AGI
Are pre-organization subscriptions considered securities?
Yes
How are payments received by the owner of a tax qualified variable annuity taxed?
100% taxable
Referring to portfolio investment styles, which style represents an active/active investment?
Portfolios that are rebalanced more frequently than one time annually are considered to be actively rebalanced. If investments are managed by a professional investment manager, then they are also active. Active/active
Referring to portfolio investment styles, which style represents an passive/passive investment?
Portfolios that are rebalanced one time annually or less are considered to be passively rebalanced. If investments are matched to an index, then they are passively managed. Passive/passive
Is alimony considered “earned” income?
No. It is not earned income but it IS taxed at the same rate as earned income
The arithmetic mean of a portfolio return is a measure of:
Central tendency; an average
In a secondary offering, a member who acted as manager or co-manager CANNOT issue a research report on that company within how many days following the effective date?
3 calendar days
Any deposits or withdrawals made in cash that amount to over $10,000 over a 2-week window must be reported to FinCEN within how many days?
15 days
Under IA-1092, a person who advises customers on their selection of ___________ is considered to “give advice about investing in securities”
An investment adviser.
A person that selects an investment adviser for a customer is also defined as an “investment adviser.” A person who helps a customer choose a broker-dealer DOES NOT fall under the definition
Dollar weighted average return is the same as:
Internal rate of return
What is dollar weighted average return?
It is the return achieved, accounting for the timing of all cash flows (deposits) into the fund and all cash redemptions from the fund made by that investor. It is the same as the Internal Rate of Return, and will vary with the timing of each investor’s deposits and withdrawals
What is time weighted average return?
Time weighted average return is the measure used for mutual fund performance charts. It reflects the growth that would be achieved from a 1-time investment into the fund and then holding that investment over time - this is a buy and hold strategy. This method is consistent when comparing one fund’s performance to another fund’s performance
Distributions from a non-tax qualified variable annuity are taxed at what rate?
Ordinary income tax rates
The term “discount fund analysis” would apply to:
Closed end management company.
Closed-end funds can trade for less than NAV if investors are bearish on the fund. In contrast, mutual fund shares cannot go to a discount to NAV
What is Tactical asset management?
The permitted variation from the fixed percentage of assets to be placed in each asset class given to the asset manager under an asset allocation scheme
What is portfolio rebalancing?
The reallocation of funds in an asset allocation model from overperforming asset classes to those that have underperformed. In this manner, the percentage allocations to each asset class are kept within the desired range
What is included in Form ADV part 1?
Basic registration info filed with the SEC:
- Name of firm
- address
- phone number
- officers & shareholders
- STATES where the adviser is registered
What is included in Form ADV Part 2A?
the “Brochure”. It includes the investment adviser’s:
- policies
- fees
- education
- types of investments
- types of clients
- method of analysis used
- conflicts of interest
What is included in Form ADV Part 2B?
“Brochure Supplement” which details the educational and work background of the key personnel who make investment decisions or manage accounts
What type of company does FINRA regulate?
Broker Dealers (NOT IA’s)
What type of company does the SEC regulate?
Investment Advisers
If a company has 100 shareholders and $100,000 of initial capital with the purpose of investing in securities, this company must be registered under:
The Investment companies act of 1940
The Investment Advisers Act of 1940 requires that records be maintained for how many years?
5 years.
Note that NASAA has the same 5 year rule for State-registered advisers
How long are broker dealers required to keep their records under the SEC act of 1934?
3 years, with the exception of customer account statements, which must be retained for 6 years
Can pensions or other retirement plans trade on margin?
No, only cash accounts (fully paid positions) are permitted
