Olivera Winkelaar- Ch1

Question 1

what is a mutual fund ?

Answer 1

Is an investment vehicle that pools contributions from investors and income, invests these proceeds into a variety of securities, including stocks, bonds and money market instruments. Individuals who contribute money become share or unit holders in the funds and share in the income, gains, losses and expenses the fund incurs in proportion to the number of units or shares that they own.

Question 2

why were mutual funds developed?

Answer 2

Because of the cost in building a portfolio of individual stocks. MF solved this problem by giving investors with minimal funds access to a product that offered a professionally managed and diversified portfolio of securities at a lower cost.

Question 3

What is the value of licensing

Answer 3

It shows that:

1. You are committed to your professional development
2. You have achieved a level of competence in understanding the importance of making recommendations that are suitable based on knowing your client.
3. You understand the importance of dealing with clients in an ethical manner.
4. You understand the responsibility regulators play in protecting the integrity of the industry.

Question 4

What are your responsibility when dealing with clients?

Answer 4

The responsibility is:
1. Legal- suitable for the client
2. Ethical- clients needs above your own needs
3. Professional- provide the best client service possible
You have the obligation to refuse to sell an unsuitable product to the client.

Question 5

What is KYC- know your client? And what rules it imposes on you?

Answer 5

Imposes a higher standard of care on you than is you were merely executing the client’s orders. The mutual fund sales representative-client relationship requires that you act carefully, honestly, and in good faith when dealing wit the client, and do not take advantage of the trust the client has place in you.

Question 6

What happens if a client does not want to provide the information for the KYC?

Answer 6

As a licence sales person you are obligated to turn down the sale. Your legal, ethical and professional responsibility requires you to do so in some cases.

Question 7

State the five basic components of knowing your client.

Answer 7

Knowing your client means:
1. Financial goals and objectives
2. Financial circumstances
3. Personal Circumstances
4.  Investment knowledge
5. Ability to tolerate risk
All these components are interrelated.

Question 8

What are people that can’t tolerate risk called?

Answer 8

Risk averse

Question 9

What are people that can tolerate risk called?

Answer 9

Risk tolerant

Question 10

What other factor is important besides the KYC when you are selling a MF to a client.

Answer 10

You need to know your product.

1. How the product is constructed
2. How it performs in different market conditions
3. Sale changes
4. Annual fee
5. The conditions and cost when the fund is sold
6. The type of income it earns for the investor

Question 11

What is the role of a mutual fund sales representative?

Answer 11

You play the important role of ensuring that the client purchases are suitable given their predetermined financial goals, financial circumstances, personal circumstances, investment knowledge and ability to tolerate risk. You and the client will work together to obtain the necessary information to judge whether the client’s characteristics fit the investment the client has in mind. When the fit is poor, you need to explain why the product is unsuitable and if possible suggest a suitable alternative.

Question 12

Explain how the role of the mutual fund sales representative is different from the role of a financial planner.

Answer 12

A mutual fund sales representative does not help the client to set financial goals, such as saving for retirement or saving to buy a new car; that is the role of the financial planner. A mutual fund sales representative does not help the client to set a family budget or indicate how much the client should save each month or year; that is also the role of a financial planner. The mutual fund sales representative starts from the client’s pre-defined goals and then helps the client to select suitable mutual fund investments consistent with those goals.

Question 13

State and explain the three types of responsibility sales professionals have when selling investment products.

Answer 13

Sales professionals have legal, ethical and professional responsibilities. The legal responsibility, as stated in provincial securities legislation, is that the salesperson must make sure that the client buys only suitable investment products. Ethical responsibility refers to the idea that the salesperson must place the interests of the client first and without regard to the impact on the salesperson or on the financial institution. Professional responsibility refers to the idea that salespeople must make an effort to provide excellent client service.

Question 14

What is the difference between complying with the rules and ethical conduct?

Answer 14

Complying with the rules means following laws, rules and all regulatory requirements put in place by governments, self-regulatory organizations and firms. Ethical conduct means not only to comply with the letter of the law but also with the spirit of the law. There can be circumstances where behavior complies with the rules in place but at the same time can be unethical.

Question 15

Know your product means understanding the characteristics of the funds you recommend. List some of the mutual fund characteristics you must understand before recommending it to a clien

Answer 15

The five basic components of knowing your product are:
How the product is constructed
How it is likely to perform in various market conditions
Sales charges (if any)
Annual fees charged by the fund
Conditions when the investor decides to sell
Type of income that the fund earns