Unit 12 | Suitability Information & Approvals Flashcards
An individual’s net worth is
A. the difference between the individual’s assets and the individual’s liabilities.
B. best determined by examining the individual’s income statement.
C. largely irrelevant in identifying the individual’s investment objectives.
D. another term for discretionary income.
A. An individual’s net worth is the difference between the individual’s assets and the individual’s liabilities. It is determined from the personal balance sheet rather than the personal income statement. Net worth is relevant in determining an individual’s investment objectives. Clients with a negative net worth might prefer reducing their debt before beginning an investment program.
In designing an investment portfolio for a new client, one of the first things to do is determine the client’s
A. home address.
B. Social Security or tax ID number.
C. risk tolerance.
D. beneficiary.
C. You can’t adequately present investment recommendations without understanding the client’s risk tolerance. Home address and Social Security number are legal requirements for opening the account, but they don’t enter into the decision-making process for portfolio design. Yes, you will want to know the beneficiary of any IRAs or qualified plans, but that has little to do with the nature of your recommendations.
All of the following are financial considerations in a customer profile, except
A. the balance in the 401(k) plan.
B. wanting to retire at age 65.
C. annual income.
D. the remaining balance on the home mortgage.
B. Wanting to retire at age 65 is a goal and is a nonfinancial consideration. Financial investment considerations can be expressed as a sum of money (total liabilities, for example) or as a numerical cash flow (gross income of $160,000 per year, for example).
Which of the following would be considered nonfinancial investment considerations on a customer profile?
A. Total fixed assets
B. Attitude toward risk
C. Monthly income available for investment
D. Amount saved in a 401(k) plan
B. Nonfinancial investment considerations cannot be expressed as a concrete sum of money or as a specific monthly, yearly, or weekly cash flow. Attitude toward risk cannot be expressed in numbers at all.
In constructing a profile for your customer, you wish to assemble information on both financial and nonfinancial investment considerations that affect your customer.
Which of the following qualify as financial investment considerations?
I. Your customer’s tolerance of various forms of risk
II. Your customer’s dependents and their ages
III. Your customer’s liquid net worth
IV. Your customer’s monthly credit card payments
A. II and IV
B. I and II
C. I and III
D. III and IV
D. Liquid net worth and expenses such as credit card payments involve concrete sums of money and cash flow, and thus, they are financial.
The number of dependents and risk tolerance should be considered regarding suitability and making appropriate recommendations, but they are nonfinancial considerations.
All of the following are financial considerations in a customer profile, except
A. the balance in the Roth IRA.
B. wanting to learn a new language.
C. an expected inheritance.
D. the equity in a vacation home.
B. Wanting to learn a new language is a goal and is a nonfinancial consideration. Financial investment considerations can be expressed as a sum of money (total liabilities, for example) or as a numerical cash flow (gross income of $160,000 per year, for example). LO 12.a
A member firm wishing to verify the accredited investor status of a client would be least likely to ask for
A. the past two years of tax returns.
B. a written confirmation from a lawyer admitted to the bar in the client’s state of residence.
C. a current paycheck stub.
D. bank or brokerage statements.
C. Because a representative needs to see the client’s income for the past two years, a current pay stub does not provide sufficient information.
Which of the following is correctly referred to as an investment goal rather than an objective?
A. Current income
B. Endowing a scholarship at your alma mater
C. Conservative growth
D. Speculation
B. Goals are what you hope to have the money for. Objectives are the way to get there. Remember the triangle for G, I and S. The S is for stability. The opposite of stability is speculation, and that is another one of the objectives. For some investors, that is the route they choose to take.
A registered representative is interviewing a new customer, age 27. The customer wants to list capital appreciation as the primary investment objective for the account and is willing to take a moderate risk at this time in her life. The customer also notes concern about inflation and how it will impact her portfolio over time. Which of the following investments is the most suitable recommendation?
A. Equities such as common and preferred stock
B. Corporate debt securities
C. Municipal debt securities
D. Long-term government bonds
A. Equities would be the most appropriate investment, given the customer’s age, capital appreciation investment objective, and willingness to accept moderate risk. The remaining answer choices, each with varying risk characteristics, are not likely to meet the capital appreciation objective. LO 12.b
FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. Which of the following is not one of those three?
A. Reasonable-basis suitability
B. Qualitative-basis suitability
C. Customer-specific suitability
D. Quantitative suitability
B. The rule does not refer to qualitative-basis suitability. It does say that a recommendation may be suitable if at least some investors would benefit from it (reasonable-basis suitability). The recommendation should also consider the specific customer’s profile (customer-specific suitability). Finally, although a particular recommendation may be suitable, there could be a churning violation when looking at the trading quantity (quantitative suitability). LO 12.b
When a registered representative opens a new options account for a client, in which order must the following actions occur?
I. Obtain approval from a qualified supervisor.
II. Obtain essential facts from the customer and provide the ODD.
III. Obtain a signed options agreement.
IV. Enter the initial order.
A. I, II, III, IV
B. I, II, IV, III
C. II, I, IV, III
D. II, I, III, IV
C. The steps in opening an options account occur in the following order: obtain essential facts about the customer, provide the customer with an options disclosure document (ODD), have the manager approve the account, enter the initial order, and have the customer sign and return the options agreement within 15 days.
Which of the following accounts could be opened without any legal documents?
A. UTMA
B. Trust
C. Estate
D. Pension plan
A. Fiduciary accounts require legal documentation establishing the power of the fiduciary. There is an exception for UTMA and UGMA accounts.
If Alpha Enterprises, Inc., wants to open a cash account, a firm must have all of the following documents on file except
A. a hypothecation agreement.
B. a new account form.
C. a copy of the corporate charter.
D. a copy of the corporate resolution.
A. A hypothecation agreement is only needed to open a margin account. Any cash account must have a new account form on file. For a corporate account, the corporation’s charter must be provided as proof that the corporation exists. In addition, a corporate resolution is needed to designate the officers) authorized to enter orders.
Under FINRA rules, customers who are approved to trade options must receive a copy of the OCC Options Disclosure Document
A. within 15 days of account approval.
B. at the time of or before the mailing of the following monthly statement.
C. at the time of or before the mailing of the confirmation representing the first options trade.
D. at the time of or before account approval.
D. All customers who are approved by the registered options principal (ROP) to trade options must receive a copy of the OCC Options Disclosure Document at or before the time the account is approved to trade options.
It is the options account agreement that the customer must return within 15 days. LO 12.d
When opening a margin account for an individual customer, several documents are required. Which one of the following never requires the customer’s signature?
A. The margin risk disclosure document
B. The credit agreement
C. The hypothecation agreement
D. The loan consent agreement
A. The margin risk disclosure document must be furnished to the margin account customer, but there is nothing for the customer to sign. A clue to that being the correct choice is that it is the only one without the word agreement. Agreements must be signed. Although the loan consent agreement is optional, if the customer wishes to permit the lending of their securities, the agreement must be signed. LO 12.d
