UNIT 26 QBANK Flashcards
Your client, Janice Thomas, is an active trader and wants to invest in a managed equity portfolio that he can trade intraday. Which of the following should you recommend?
A) An exchange-traded fund (ETF)
B) A mutual fund
C) An exchange-traded note (ETN)
D) A closed end fund
D) A closed end fund
Explanation
A closed end fund is actively traded and most of them are equity funds. They trade on the exchanges like stocks. Mutual funds can be equity funds and can be actively managed, but because they only trade once per day, they are not good for active trading. ETF are actively traded but are not actively managed. ETNs are debt securities, not equities.
Considering a customer’s nonfinancial considerations is as important as considering the customer’s financial concerns. Included in the category of nonfinancial considerations are
I. salary.
II. marital status.
III. credit card debt.
IV. number and ages of dependents.
A) I and III
B) I and IV
C) II and IV
D) II and III
C) II and IV
II. marital status.
IV. number and ages of dependents.
Explanation
Nonfinancial considerations are those that are not generally monetized. Even so, they can sometimes be more important than the financial ones. Things like marital status and the number and ages of the customer’s dependents play a critical role in determining the appropriate investment strategies. Of course, knowing the salary and debt is important, but those are financial considerations, not the subject of this question.
Which of the following investments would not require heightened suitability requirements before recommending them to your clients?
A) An oil and gas limited partnership
B) A hedge fund
C) An exchange-traded note (ETN)
D) A Utilities Mutual Fund
D) A Utilities Mutual Fund
Explanation Mutual funds are generally considered suitable for a broad class of investors. ETNs, limited partnerships, and hedge funds are complex products (often illiquid) that require heightened suitability.
Your client, Nate Bauer, has been investing for several years and is comfortable with moderate risk as long as he can get in and out of the investment easily. His portfolio is mostly in stock and he would like to diversify into some other asset classes and thinks real estate would help with that. Which of the following would be most suitable for you to recommend for him?
A) A nonregistered real estate investment trust (REIT)
B) An investment in individual rental properties
C) A listed real estate investment trust (REIT)
D) A real estate limited partnership
C) A listed real estate investment trust (REIT)
Explanation
A listed REIT trades on an exchange and meets Bauer’s requirement for liquidity. The other three options are not very liquid.
When discussing investing with your client, all of the following would be considered recommendations except
A) suggesting a particular investment strategy.
B) suggesting different market sectors.
C) advising on the benefits of day trading.
D) discussing the pros and cons of traditional IRAs and Roth IRAs.
D) discussing the pros and cons of traditional IRAs and Roth IRAs.
Explanation
Suggesting or advising various strategies, market sectors, or products would be considered recommendations. Discussing pros and cons of IRAs and Roths would not be considered recommendations.
To meet the requirements of the know your customer rule, a registered representative would be required to gather information on all of the following except
A) all of the essential facts about the customer related to the investment.
B) what the customer’s objectives are.
C) the customer’s financial and nonfinancial investment considerations.
D) if the customer graduated from college.
D) if the customer graduated from college.
Explanation
The investment objectives of the customer is critical to making a recommendation, as well as any other financial or nonfinancial considerations related to the investment. The registered representative should know all the essential facts about the customer. Graduation from college is not a requirement.
Which of the following investments would not require heightened suitability requirements before recommending them to your clients?
A) An exchange-traded note (ETN)
B) A utilities mutual fund
C) A hedge fund
D) An oil and gas limited partnership
B) A utilities mutual fund
Explanation Mutual funds are generally suitable for a broad class of investors. ETNs, limited partnerships, and hedge funds all have specific suitability requirements.
Your client Harry Swenson is very frugal. He feels like mutual funds have too many expenses, and he doesn’t believe over a long period of time that the active management of investment advisors can outperform their respective bench marks. He likes the idea of a pooled investment in the stock market rather than picking individual stocks on his own. Which of the following types of investments should you recommend?
A) An exchange-traded note (ETN)
B) An open-end fund
C) An exchange-traded fund (ETF)
D) A closed-end fund
C) An exchange-traded fund (ETF)
Explanation
Both open-end and closed-end funds have active management and have an investment advisor managing the portfolio that is paid a fee from the assets of the fund. ETNs are a debt investment not an equity investment. ETFs meet all of Harry’s criteria.
As they apply to knowing your customer and making recommendations which of the following are true statements?
I. The term investment strategy applies to recommendations to buy and sell only.
II. The term investment strategy applies to recommendations to buy, hold and sell.
III. Only financial considerations such as income and net worth should be considered when making recommendations.
IV. Nonfinancial considerations such as marital status and age should be considered as well as financial considerations when making recommendations.
A) I and IV
B) I and III
C) II and III
D) II and IV
D) II and IV
Explanation
The term investment strategy applies to recommendations to invest in, hold, or sell specific securities. When making recommendations, both financial and nonfinancial items in a customer’s profile should be considered.
Which of the following would be recommendations?
A) Discussing the pros and cons of noninvestment products and services with a prospective client
B) Discussing the advantages of day trading with an existing client to generate more business for you and your firm
C) Discussing the advantages of your firm over another firm with a prospective client
D) Discussing the pros and cons of a variety of account types and registrations with a prospective client
B) Discussing the advantages of day trading with an existing client to generate more business for you and your firm
Explanation
Discussions with individuals who are not clients of the firm and discussions that are not regarding investments are not considered a recommendation. Suggesting a particular strategy with an existing client is recommendation.
Recommendations regarding investment strategies under the know your customer (KYC) rule would not apply to recommendations to
A) buy, hold, or sell common stock.
B) make equity purchases in a particular market sector.
C) make purchases and sales intraday (day trading).
D) buy or sell commodities.
D) buy or sell commodities.
Explanation
The definition of investment strategy does not include non-security investments such as commodities or fixed annuities. The term does apply to recommendations to invest in (buy), hold, or sell specific securities, as well as specific market sectors; trading, both long or short-term; or divesting of any asset or investment to make funds available to purchase securities.
Which of the following is a nonfinancial investment consideration?
A) The customer’s total credit card debt
B) The customer’s place of employment and status
C) The amount of the customer’s monthly income available for investment
D) The customer’s net worth, excluding his home and property
B) The customer’s place of employment and status
Explanation
Nonfinancial investment considerations are anything that can’t be preceded by a dollar sign. The customer’s place of employment and status is the only choice that affects the customer’s investment characteristics but doesn’t directly represent either a lump sum of money or a cash flow.
Your client, Harry Swenson, is very frugal. He feels like mutual funds have too many expenses and he doesn’t believe that over a long period the active management of investment advisors can outperform their respective benchmarks, but he likes the idea of a pooled investment in the stock market rather than picking individual stocks on his own. Which of the following types of investments should you recommend?
A) A closed end fund
B) An exchange-traded note (ETN)
C) An exchange-traded fund (ETF)
D) An open end fund
C) An exchange-traded fund (ETF)
Explanation
Both open end and close end funds have active management and have an investment advisor managing the portfolio that is paid a fee from the assets of the fund. ETNs are a debt investment, not an equity investment. ETFs meet all of Swenson’s criteria.
Your client, Dana McRae, has no investment experience. She just retired and won’t be in a high tax bracket. She also is concerned about volatility of her investments. She is more concerned about preserving her principal than getting a high rate of return. Which of the follow would you recommend?
A) A newly issued U.S. Treasury bond
B) A money market mutual fund investing in short-term corporate debt
C) A long-term U.S. government bond mutual fund
D) A money market mutual fund investing in short-term debt from city and county governments in her state
B) A money market mutual fund investing in short-term corporate debt
Explanation
The money market funds have a stable $1 value, but she doesn’t need the municipal money market because she isn’t in a high tax bracket. The other two options will have significant volatility.
Your client Dana McCarthy has no investment experience. She just retired and won’t be in a high tax bracket. She also is concerned about volatility of her investments. She is more concerned about preserving her principal than getting a high rate of return. Which of the follow would you recommend?
A) A newly issued U.S. Treasury Bond
B) A long-term U.S. Government Bond Mutual Fund
C) A money market mutual fund investing in short-term corporate debt
D) A money market mutual fund investing in short-term debt from city and county governments in her state
C) A money market mutual fund investing in short-term corporate debt
Explanation
The money market funds have a stable $1 value, but she doesn’t need the municipal debt money market because she isn’t in a high tax bracket. The other two will have significant volatility.
Which of the following investments would not require heightened suitability requirements before recommending them to your clients?
A) A hedge fund
B) An exchange-traded note (ETN)
C) An oil and gas limited partnership
D) A utilities mutual fund
D) A utilities mutual fund
Explanation Mutual funds are generally suitable for a broad class of investors. ETNs, limited partnerships, and hedge funds all have specific suitability requirements.
As they apply to knowing your customer and making recommendations which of the following are true statements?
I. The term investment strategy applies to recommendations to buy and sell only.
II. The term investment strategy applies to recommendations to buy, hold and sell.
III. Only financial considerations such as income and net worth should be considered when making recommendations.
IV. Nonfinancial considerations such as marital status and age should be considered as well as financial considerations when making recommendations.
A) II and IV
B) I and III
C) I and IV
D) II and III
A) II and IV
II. The term investment strategy applies to recommendations to buy, hold and sell.
IV. Nonfinancial considerations such as marital status and age should be considered as well as financial considerations when making recommendations.
Explanation
The term investment strategy applies to recommendations to invest in, hold, or sell specific securities. When making recommendations, both financial and nonfinancial items in a customer’s profile should be considered.
Your client Harry Swenson is very frugal. He feels like mutual funds have too many expenses, and he doesn’t believe over a long period of time that the active management of investment advisors can outperform their respective bench marks. He likes the idea of a pooled investment in the stock market rather than picking individual stocks on his own. Which of the following types of investments should you recommend?
A) A closed-end fund
B) An open-end fund
C) An exchange-traded fund (ETF)
D) An exchange-traded note (ETN)
C) An exchange-traded fund (ETF)
Explanation
Both open-end and closed-end funds have active management and have an investment advisor managing the portfolio that is paid a fee from the assets of the fund. ETNs are a debt investment not an equity investment. ETFs meet all of Harry’s criteria.
