What Does the Series 7 Mean by Suitability?

When the Series 7 Exam asks 70 questions on "suitability," what does that actually mean? Well, as you would assume, it covers recommendations to customers that you will make through short-story questions. But, the suitability questions also expect you to know about economic factors, industry news sources, and product features/benefits/risks/costs. This is from the Series 7 Exam outline:

TASKS:

T4.1 Obtains information regarding current domestic and global market events, economic/financial news, industry sectors, and the status of markets and securities from various appropriate sources to assess how this information may impact the markets, issuers and customers’ accounts
T4.2 Communicates relevant market, investment and research data to customers
T4.3 Makes suitable investment recommendations
T4.4 Provides appropriate disclosures concerning products, risks, services, costs and fees
T4.5 Provides customers with information on investment strategies and explains how the risks and rewards of a particular investment or strategy relate to the customer’s financial needs and investment objectives

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Suitability of Options on Series 7 Exam

Series 7 exam questions on options do not always involve calculations or numbers of any kind. To me, the most challenging and relevant options questions on the Series 7 exam are the ones that ask for a recommendation. If the customer has purchased the stock and now feels it may "move sideways," how can he generate additional income?
He can sell a covered call. Now, don't assume your question will use the word "sideways," as if that is some scientific term. It will let you know in some subtle, roundabout way that the stock is expected to go, like, nowhere, so why not collect call premiums rather than just sit around doing nothing?
If an investor expects the stock to sit perfectly still over the next few weeks or months, his maximum, gutsy play would be to write a straddle. I mean, if the stock really goes nowhere, both the writer of a call and the writer of a put would profit; therefore, why not be BOTH the writer of a call and the writer of a put with the same strike price? On the other hand, one only buys a straddle if he feels the stock will surely move big-time in either direction. Buyers of options need MOVEMENT, so if the question implies that the individual feels the stock might not move, that person is a SELLER of options. If you BUY an option, the stock always has to move, and by more than the premium you just paid to get in. This is true of buying single calls and puts, buying straddles, and establishing debit spreads--all are BUYERS, all need movement from the underlying instrument. If you think the market might sit still or work against the buyer, you sell calls and puts, sell straddles, or establish credit spreads. Suitability Questions in ExamCram Online

Suitability of Annuities on Series 7 Exam

If you're trying to make a recommendation concerning annuities in a Series 7 exam question, carefully read the facts to determine the following. First, does this investor want a safe, guaranteed rate of return backed by an insurance company's claims paying ability, or do they seek purchasing power protection/growth? If the former--they need a fixed or indexed annuity. If the latter, they're leaning toward a variable annuity--IF they can handle the risks of the stock and bond markets.

Now, when do they need the money to start coming out of the account? If they're at retirement age now, they need the money immediately--they want an immediate fixed, immediate indexed, or immediate variable annuity. If retirement is a long way off, and they won't have to touch this money for 10 years or more--they want a deferred fixed, deferred indexed, or deferred variable annuity.

Those are really the only big considerations. Do you want an insurance product or a securities product? Fixed and indexed annuities are insurance products. They buy a lot of sleep but don't provide much return. Variable annuities offer more upside and purchasing power protection, but the money is not really safe here. Then, when do you want to start taking withdrawals? Now--immediate annuity. Later--deferred annuity. Suitability Questions in ExamCram Online

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

CRD, U4, U5 Reporting

If you click the following link, you will see how important all this U4, U5, BrokerCheck/CRD stuff actually is: http://www.finra.org/Newsroom/NewsReleases/2012/P177007.

We're not picking on this member firm. We're just using the headline from the FINRA website to illustrate how important it is for registered reps to promptly update their U4 information, especially when the information is embarrassing (see other post "felonies and finra registration").

Full disclosure is the foundation for our securities markets. The public needs to know about the individuals in the industry who have disciplinary problems, or have paid out arbitration awards/settlements based on their bad behavior. If a member firm and its associated persons deprive the regulators and the public of this information, investors are clearly harmed. And FINRA clearly will respond. Series7 - Need Help?

What's the deal with this Facebook IPO?

The media white noise surrounding Facebook's IPO can lead to confusion, but, really, the issues are simple. And, they relate to your exam in many ways. First, what IS an "IPO"? Think of a successful company in your area--what if they wanted to be in 25 cities, needed storefronts, delivery vans, manufacturing equipment, what have you? What they need is "capital," and they raise it from high-risk investors interested in buying a percentage of the company's bottom line through something called "common stock." In my little DVD materials, I mention in passing that "after reading the prospectus, the investors like the risk/reward characteristics of the company enough to buy the stock." Well, that's what should happen--in this case, it didn't. If the folks who got suckered into buying the Facebook IPO had spent an hour or two on a Sunday morning reading the prospectus, they would have noted some curious things. Like, first, even though an IPO is designed to raise much-needed capital for expanding businesses, Facebook didn't really need any capital. Their balance sheet was very strong already. Not that the company was actually getting most of the money anyway--more than HALF of the shares "investors" bought in the IPO were being sold by existing shareholders, the early investors cashing in on their American Dream (good for them, btw). So, the IPO was really just a way to cash in on the Facebook brandname for a handful of early investors, who knew that when a stock is priced at a P/E ratio of OVER ONE HUNDRED, it's probably time to sell. And, sell, they did. The buyers of that stock are already down more than 25% on their "investment," and they can yammer on and on about how their holding is now a "buy-and-hold position," but that's total BS. That stock is going to drop another 50% from where it's at imho, and then folks can sit on it for generations without ever seeing a gain. Some people have the mistaken impression that a great brand name = a great company = a great stock. Not. Facebook's growth is slowing massively and can not support a P/E of over 100. If that P/E drops to, say, 25 . . .well, just be glad you didn't buy in.

What the heck is a Unit Investment Trust?

We're all familiar with open-end mutual funds because they've been marketed quite successfully by household names including Fidelity, Vanguard, Janus, and American Funds. With UITs or "Unit Investment Trusts," few people seem to be familiar. I like to think of it this way--eventually, I'm going to want to devote a serious percentage of my investment capital to fixed-income. I don't need the ultra-safety (and low yields) of US Treasuries, and since most of my investing is still done in a retirement account, I shun municipal bonds, as well. I need corporate bonds, but I can't buy the things outright without devoting say $100,000 per issue. And, I don't want to be exposed to just two or three issuers. So, I need a portfolio. I don't necessarily need an investment adviser trading that portfolio, however. If I don't want to pay management fees and don't necessarily believe that an actively managed portfolio of bonds will outperform an un-managed portfolio, I buy a unit investment trust as opposed to an open- or closed-end mutual fund. I figure the trustee will oversee/supervise the portfolio and only charge minimal fees to administer the trust. The rest of the income gets paid pro rata to us unit holders, and we can redeem our units for whatever they happen to be worth at the time. Many UITs are a portfolio of preferred stock, and that might be even more to my liking. Hold these in the taxable account and enjoy qualified dividends plus a well-diversified portfolio of fixed-income securities I'm too lazy to buy or manage myself. More Help