In Depth Suitability Scenarios Flashcards
Customer Name: Joey Jones Age: 30 Marital Status: Single Dependents: None Occupation: VP - Marketing - ACCO Corp. Household Income: $250,000 Net Worth: $110,000 (excluding residence) Own Home: No - Rents Investment Objectives: Aggressive Growth / Early Retirement Investment Time Horizon: 20 years Investment Experience: 0 years Current Portfolio Composition: 401k: $70,000 Cash in Bank: $40,000
The customer informs you that he just got married and that his wife intends to work for the next 5 years before they think about children. In order to make recommendations to the client due to these changed circumstances, the registered representative should:
A. ask the customer if he wishes to open a joint account with his wife
B. update the account profile to include the wife’s financial information
C. obtain the wife’s social security number and perform a credit check
D. update the account file with a copy of the customer’s marriage certificate
The best answer is B.
Getting married is a life-changing event, both from a personal standpoint and a financial planning standpoint. Since the new wife will be working for 5 years, there will be additional income that can be invested. The financial goals and investment time horizon are likely to change as well. The first step is to update the financial profile based on the new circumstances.
A young aggressive investor gets laid off from her job. She has a net worth of $80,000 and has received a 1-time severance payment of 3 times her annual salary ($240,000 payment). In addition, she gets medical coverage for 1 year. The appropriate action for the registered representative to take is to:
A. change the account investment objective to income and safety and invest the $240,000 severance payment based on these objectives
B. do nothing unless written instructions are received from the customer
C. discuss the situation with the client to determine if it is appropriate to change the investment objective before making any further investments
D. recommend a balanced mutual fund investment that will give this younger client moderate income in addition to growth
The best answer is C.
There has been a change in the client’s financial situation. Before doing anything in the account, the situation should be discussed with the client to see what her current needs are. Then an appropriate recommendation can be made. At this point, we don’t know if Choices A and D might be appropriate for the client - they could be, but only after the representative has a talk with the client.
A customer, age 51, has a 20 year investment time horizon, a moderate risk tolerance, and is looking for investments that provide both income and growth. The best recommendation would be:
A. money market instruments
B. mutual funds
C. bonds
D. large capitalization growth stocks
The best answer is D.
Money market instruments are very safe, but provide little income and no growth. These would be recommended to a customer seeking preservation of capital - not to a customer seeking income and growth.
Choice B, mutual funds, is too generic to be a valid choice. There are all kinds of mutual funds out there, for all types of investment objectives.
Choice C, bonds, is also too generic to be a valid choice. Also, while bonds provide income, they do not provide growth.
Choice D, large capitalization growth stocks, is the best one offered. Large capitalization stocks pay dividends for income, and also offer long term growth potential, meeting both of the customer’s objectives.
A married couple, ages 55 and 52, with no children, are both employed at DEF Corporation. They have asked for an evaluation of their current portfolio. They have a combined annual income of $200,000 per year and a fully paid home worth $500,000. Their current portfolio shows:
$50,000 Common Stock of DEF Corp in a 401K account $100,000 Large Cap Growth Fund $150,000 Government Bond Fund $150,000 Corporate Bond Fund $200,000 Money Market Fund
Both intend to retire in 20 years and are conservative investors, looking for moderate growth and moderate risk. Which of the following recommendations is BEST for this couple?
A. The current portfolio allocation is consistent with their stated investment objective and risk-tolerance level
B. The portfolio should be reallocated based on their stated investment objective, reducing the cash and bond percentage by 50% and using the proceeds to buy a small or mid-cap growth mutual fund
C. The portfolio is overweighted in fixed income securities, which should be completely liquidated and the proceeds used to buy aggressive growth stocks
D. The current portfolio allocation overexposes the couple to stock-specific risk if the fortunes of DEF Corp. decline in the future
The best answer is B.
Since this couple has a stated investment objective of growth with moderate risk, a portfolio that only has about 25% equities and that has 75% fixed income securities is inappropriate - since it will provide income; but little growth. The long-term bond and cash allocation should be reduced and replaced with growth stocks to better balance the portfolio. Choice C is way too speculative for a “conservative investor.” Choice D is somewhat true since this couple is investing in their employer’s stock - but since the stock only represents 8% of the customer’s total portfolio, this is not an excessively large percentage.
A 57-year old customer, earning $85,000 per year, is currently employed as an outside salesman. He enjoys his work so much that he has no intention of retiring until at least age 75. He wants to put extra money away for his retirement at that time and can make contributions of about $5,000 per year. He does not want to be forced to take distributions starting at age 70 1/2. The BEST type of retirement plan for this individual is a:
A. Traditional IRA
B. Roth IRA
C. Coverdell ESA
D. 401(k) Plan
The best answer is B.
Only a Roth IRA permits contributions to continue after age 70 1/2 if one is still working and only a Roth IRA does not require that distributions start at age 70 1/2. Roth IRA contributions are not deductible; the account grows tax deferred; and when distributions are taken, no tax is due. These are great from a tax standpoint, but they are not available to high-earning individuals (this individual is not a “high-earner” and is below the income phase-out range. Distributions from Traditional IRAs and 401(k) accounts must start at age 70 1/2 and are taxable. Coverdell ESAs (Education Savings Accounts) are not retirement plans.
