Tuesday, November 27, 2012

Series 7 Sample Suitability Question

As you've heard, the Series 7 has many questions concerning suitable recommendations to investors . . . like this one:

One of your customers is in her early 50's. She is concerned about losing purchasing power once she retires from teaching in 10 years, with a modest defined benefit pension. The money she has to invest is an inheritance from a favorite aunt. She has no need to liquidate the investment until she retires, and she may wait several years after that. You would most likely recommend which of the following investment vehicles?
A. deferred indexed annuity
B. deferred variable annuity
C. long-term bond mutual fund
D. immediate fixed annuity

EXPLANATION: first, PLEASE stop doing the Sesame-Street-inspired one-of-these-things-is-not-like-the-other thing. I made Choice C different from the other three, but it's still wrong. Why? Bonds don't protect purchasing power. Fixed annuities also do not protect purchasing power, so we can eliminate Choice D. At this point, the answer seems obvious, doesn't it? She needs the upside of the stock market that the variable annuity offers.  The indexed annuity is all about the guaranteed minimum rate of return--the annuitant does not get the upside on the S&P 500. Not really. So, eliminate Choice A, and we're done here.


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