S6: Evaluation of Customers Flashcards
A person looking for INCOME would want ______
Preferred Stock
Aggressive growth portfolios tend to have ______ yields
Low
Muni bonds are most suitable for investors in _______ tax bracket
High
An investor who inherits $300,000 & wants to invest for INCOME & SAFETY should invest in a portfolio of ______ not _____
Bonds
Stocks
A customer interested in tax free income would invest in a ______ mutual fund since interest is exempt from federal taxes
Muni bond
Market Risk
- systematic risk
- cannot avoid market risk by diversification
- the risk that investors may lose some of their principal due to price volatility in the market (market price goes up/market price goes down)
Interest Rate Risk
Risk that involves the competitive cost of $
Inflation Risk
Uncertainty regarding the future purchasing power of invested dollars
A person looking for PRESERVATION OF CAPITAL & INCOME would be suitable for _______
Bonds
Credit Risk
- AKA financial/default
- financial default of the issuer
- bonds backed by federal govt or municipalities tend to be very secure & have low credit risk
Business Risk
- AKA: capital risk
- stock specific business risk that effects the stock price (not going broke)
- lu lu yoga
- chance that investors might lose all of their $ or capital under circumstances unrelated to the financial strength of the issuer
Reinvestment Risk
- risk not being able to reinvest their interest income or principal at the same rate (reaches maturity)
- concern during periods of falling interest rates
Call Risk
- the risk that a bond might be called before maturity
- the fact that the issuer could call the bond prior to maturity
Purchasing Power Risk
- AKA inflationary risk
- fixed income securities (bonds) has purchasing power risk
- danger is the result of rising prices
- if an investments yield is lower than the rate of inflation, the clients money will have less purchasing power as time goes on
Constant Dollars
- is a dollar that is adjusted (indexed) for inflation
ex: if you invested $100 a year ago, and during that year there was 10% inflation, your investment should not be worth $110 (if it isn’t you’re losing ground)
Current Dollar
- is a dollar that is not adjusted or indexed for inflation
Interest Rate Risk
- systematic risk
- the sensitivity of investments price or value to function elations in interest rates
- a bond held to maturity has no interest rate risk
- bonds & preferred stock have more interest rate risk
A long term bond purchased & held to maturity has no ______
- interest rate
Stocks & bonds would be found in the portfolio of a __________ fund
- balance
On a risk spectrum you would find equities to the ______ of a balanced fund.
- right
On a risk spectrum you would find fixed income securities (bond/debt) to the ______ of a balanced fund
- left
Fixed Income securities have _______ risk
- inflationary
Muni bonds are most suitable for investors in ______ tax brackets
- high
Beta Factors
(a security with a Beta Factor of one moves ______) with the market
- exactly
The 3 main suitability obligations under suitability include:
- reasonable basis
- customer specific
- quantitative suitability
The triggering event for the application of the suitability obligation is a _________ recommendation
- broker
Firms are required to update a clients investment profile at ________ intervals
- regular
As a registered rep, you may process _________ requests at any time. The suitability rule doesn’t apply.
- unsolicited
Systematic Risk
- unpredictable & impossible to avoid
- risk of whole system
Systematic Risks include:
- market risk
- inflationary risk
- interest rate risk
How do you avoid Credit Risk?
- diversification
- don’t put all your eggs in one basket
How do you avoid Business Risk?
- diversification
- don’t put all your eggs in one basket
How do you avoid Market Risk?
- diversify by asset class (stocks, bonds, real estate)
TYPES OF INVESTMENT RISKS (Diversification)
- only lots of different company stocks
Liquidity (Marketability) Risk
- doesn’t want liquidity risk
Financial Risk is greatest on ________
- common stock
this is the risk that you will lose your $ due to default of the issuer
Non-Systematic Risk
- avoid by diversification (stock specific)
- business risk, credit risk, liquidity risk)
Systematic Risk
- avoid by diversification by asset class
- CANNOT AVOID THIS RISK
- market, inflationary, interest rate risk, currency exchange risk
A Beta Factor of 1 on a security means that it has the ________ risk as the market in general
- same
Securities with High Beta Factors (more than 1) are ______ risky
- more
A security with a Low Beta (less than 1) is considered _____ risky
- less
A security with a Low Beta (less than 1) is known as _______ issues
- defensive
A security with a High Beta (more than 1) is known as _______ issues
- aggressive
Dollar Cost Averaging
- a method of investing that requires a specified # of dollars to be invested over consecutive periods. By investing the same dollar amt, when shares are priced low, the investor will purchase more shares.
- an average cost per share that is less than average price
- DCA does NOT guarantee a profit
Churning
- excessive trading in a customers acct
- the term suggests that the registered rep ignores the objectives & interests of clients & seeks only to increase commissions
Know Your Customer Rule
- every member shall use reasonable diligence in regard to opening & maintenance of every acct
SEC Act Rule requires B/D’s to, among other things, attempt to update certain acct information every ________ regarding accts for which the B/D’s were required to make suitability determinations
- 36 months
Suitability Rule
customer means
- includes a person who is NOT a broker-dealer who opens a brokerage account at a broker-dealer or purchases a security for which the broker-dealer received or will receive directly or indirectly compensation
Suitability Rule
- liquidity needs
- time horizon
- risk tolerance
What’s the “triggering” event of The Suitability Rule?
- a brokers recommendation
The Suitability Rule would not apply ___________
- to a recommendation made to a potential investor who does NOT act on the recommendation or executes the transaction
3 Main Suitability Obligations
- reasonable basis
- customer specific
- quantitative suitability
