Friday, September 28, 2012

Suitability and the Series 7 Exam

Hmmmmmmmm. . . . 
Registered representatives primarily make suitable recommendations to clients based on all kinds of factors: age, objectives, risk-tolerance, time horizon, personal values, tax situation, existence of retirement accounts, etc. So, rather than hitting you with a massive number of municipal securities and options questions, your exam is now expected to focus much more on suitability of customer recommendations. If your client has a son who is so far a so-so student, what if she wants to fund his education with a tax-deferred account, making sure he only gets the money if he actually goes to a 4-year college--which vehicle should she use: mutual fund, Coverdell Education Savings Account, 529 Plan, or UTMA? That is the kind of question (529 Plan, btw) you will likely see on the exam now. Has nothing to do with securities or economic factors at all--just asks you what are the features of these vehicles/accounts. You will also be expected to recommend various mutual fund options within a 529 Plan. When the child is very young, most people will invest in equity funds.When the child is 10 or so, probably time for a balanced fund. At age 16, with college a few years off, maybe 40% balanced fund, 40% short-term bonds, and 20% money market. Once college commences, maybe it's 50% short-term bonds and 50% money market.Notice how none of this is scientific, nor could it be verified by any particular document. If there were industry standards for suitability, we would find that all Target Retirement Funds have the same allocations and re-balance them at the same time. Nothing could be further from the truth.
What are you supposed to do, then? I recommend doing the quiz in Pass the 7 ExamCram called "Suitability of Customer Recommendations." Also, bone up on these topics from whatever textbook or questions you have: taxation, annuities, retirement plans, investment companies, economic factors. Get Pass the 7 ExamCram Online Test Prep


  1. so, which securities do we have to recommend in these so-called "suitability questions"?

  2. We assume that ALL securities that you study in terms of features, benefits and risks are also fair game for suitability questions. Everything from an ADR or REIT to a GNMA, CMO, etc. If the customer needs semiannual interest payments . . . or doesn't want her principal to fluctuate .. . or will make frequent withdrawals . . . what should you recommend? It's not just the securities, but the types of accounts that should be opened: 529 vs Coverdell, Roth vs Traditional IRA, etc. The ExamCram has a new quiz on suitability--up to 35 questions at this point. Hope to make it 75 soon.

  3. I have trouble knowing which type of annuity to recommend in the question, or when I should recommend annuities at all. My book doesn't have much on variable annuities, doesn't even mension fixed or indexed annuitie's.

  4. First, does the individual want a safe, guaranteed rate of return? If so, it's a fixed or indexed annuity. If they seek "purchasing power protection," they buy a variable annuity. Now, when does the individual plan on making withdrawals? Now or 10+ years from now? If now, it's an immediate annuity. If it's a retirement vehicle and the investor won't touch the money for a long time, then it's a deferred annuity. Variable annuities are almost always deferred annuities--fixed annuities can be either immediate or deferred. To me, the IMMEDIATE fixed annuity is most attractive. In fact, I'll likely put 1/3 or 1/2 my retirement money into an immediate fixed annuity when I "retire" sometime in, like, 20 years. If I hit my markers between now and then, maybe I can put $500,000 into an immediate fixed annuity and start collecting monthly checks backed by an insurance company's claims paying ability, a stream of money that won't run out until I do. To review, you want to separate annuities into the securities products (variable) and insurance products (fixed, indexed). Then, when do they want the money? Now? Fixed/indexed. Much later? Deferred.