DOL Rule concerning Proprietary Products

As I mentioned in the previous post, if you offer proprietary products, the new Department of Labor rules are about to rock your world, and not in a good way. As the DOL explains, " Proprietary products are products which the firm or its affiliate manage, issue, or sponsor, and an adviser may face increased conflicts of interest with respect to advice on such products due to the benefit to the firm. Advisers/financial institutions offering a limited set of proprietary products must fully disclose that they are offering only a restricted menu of products, and also disclose the associated conflicts of interest, adopt measures to protect investors from those conflicts, and insulate the adviser from conflicts when making recommendations from the restricted menu. In addition, advisers that recommend a limited set of products must consider what is in the retirement investor's best interest, and, if it is a product that they do not offer, they cannot recommend a product from their limited menu." That means it's going to be very difficult to sell an equity-indexed annuity to a retirement investor. And, if the broker-dealer sells mutual funds that their related investment advisory arm manage, or if they sponsor the funds as wholesalers, they are going to have to rethink that whole business model from top to bottom. This is big stuff here, people. Huge, in fact. Get Help on your Series 7 Exam

What does the new Department of Labor Fiduciary Rule mean to you?

The new Department of Labor Fiduciary Rule is too complex to handle in one blogpost. But, I can still address the basics in a few words. As the Department explains, "When the basic rules governing retirement investment advice were created in 1975, 401(k) plans did not exist and IRAs had just been authorized. These rules have not been meaningfully changed since 1975. The Proposed Regulation is intended to take into account the advent of 401(k) plans and IRAs, the dramatic increase in rollovers, and other developments that have transformed the retirement plan landscape and the associated investment market over the four decades since the existing regulation was issued. In light of the extensive changes in retirement investment practices and relationships, the Proposed Regulation would update existing rules to distinguish more appropriately between the sorts of advice relationships that should be treated as fiduciary in nature and those that should not." What that means is that if any of your customers is investing in a retirement account, you will not be able to treat him as a customer to whom any suitable product can be offered and sold. Rather, you will have to figure out a way to work with the investor as a fiduciary, with a contract stating that you intend to act as a fiduciary. A fiduciary can be sued for breach of contract if he fails to disclose all potential conflicts of interest. In other words, a fiduciary can't act like a salesman. Rather, a fiduciary has to place the needs of the client first. As the DOL states, "In order to protect the interests of the plan participants and beneficiaries, IRA owners, and small plan sponsors, the exemption would require the adviser and financial institution to contractually acknowledge fiduciary status, commit to adhere to basic standards of impartial conduct, warrant that they have adopted policies and procedures reasonably designed to mitigate any harmful impact of conflicts of interest, and disclose basic information on their conflicts of interest and on the cost of their advice." That's a sea change right there in the way registered representatives have dealt with customers up to now. Further, the DOL explains that "The adviser and firm must commit to fundamental obligations of fair dealing and fiduciary conduct—to give advice that is in the customer's best interest; avoid misleading statements; receive no more than reasonable compensation; and comply with applicable federal and state laws governing advice." BTW, for purposes of the rule, anyone who works with a retirement investor is an "adviser" going forward, whether he's licensed as a life & health-plus-securities representative, an RIA or an IAR. If you work with retirement investors you are an "adviser" under the new rules, period. Beyond the best-interest-contract with customers, registered representatives and their firms are going to have one heck of a time selling proprietary products, but this is already running longer than I intended. Need help with Series 7?

High-Risk Low-Reward?

Is it true that high risk = high reward? Maybe not. In a recent full-page ad in Forbes magazine Fidelity shows that between 1985 and 2015 ten different industry groups did not necessarily perform as their risk characteristics would have predicted. What was the riskiest--by far--of the 10 industry groups? Technology, of course. How did technology perform? Only #6.
Ouch. That right there pokes some holes in the notion that high risk = high return. But, we aren't done yet. The highest-returning industry group was health care. Where did it rank in terms of risk? Third from the bottom. Yes, the highest-returning industry group was also one of the least risky. Consumer staples was second from the bottom in terms of risk, yet it ended up second from the top for performance! What if one had invested in the least risky of all groups, utilities--surely, he would have ended up at the bottom for performance, right? Wrong. The least risky of all groups, utilities, still came in #7, just a hair behind technology, for performance. Think about that for a minute! Not only would taking on the highest-risk group not have gotten you high performance, but also, it would have gotten you just barely ahead of the lowest-risk group, utilities.
I'm not sure if technology is the most disappointing of all ten industry groups, or if we should nominate financials for that dubious honor. Financials--banks, insurance, broker-dealers, etc.--surely this was a lower-risk and higher-reward group, right? Actually, it was #4 in terms of risk but only #8 in terms of performance. No, on second thought, materials was the worst industry group. Materials was #2 in terms of risk but ended up second-from-the-bottom for returns. As I scan the excellent illustration in this full-page ad, I note that not one of the 10 industry groups ranked the same in risk as it did in reward. The one that came closest to doing that was consumer discretionary, which was #3 in risk and #4 in return. But, still, healthcare and consumer staples beat out #3, #4, and #5 by around 4 percentage points over 30 years! And, again, both industry groups were at the bottom of the pack in terms of risk.
Basically, no matter how I look at these numbers, all I can conclude is that the high-risk, high-reward myth has been soundly . . . busted. Need help on the Series 7?

Suitability Question - DPPs

Let's look at a practice question concerning suitability and direct participation programs:

If a customer on your book of business is expressing interest in a direct participation program, which of the following would you discuss with him first?

A. his appetite for risk

B. his need for liquidity

C. his experience with lower-quality bond investments  

D. his need for tax shelter

EXPLANATION: this is how the Series 7 maintains its tough reputation--all four answer choices look pretty good at first. Your job is to find fault with three of them. Are all DPP investments risky? Well--they all lack liquidity, which is a type of risk. But, existing properties is not as risky as raw land once you get past the liquidity problem. I'm not sure why this investor needs experience in junk bonds, which would not be illiquid or nearly as high-risk as most DPPs. Tax shelter is important . . . for most DPPs. But raw land programs provide no tax shelter.

Okay, so what would apply to all DPP investments?

A lack of liquidity. So, what should you discuss first with this investor? His need for liquidity.

The answer is . . .

B

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Suitability--the dreaded HOLD recommendation.

As a registered representative, you have suitability obligations whenever you make a recommendation to a customer. A recommendation could involve telling someone to buy a security, to sell a security, or even to hold a security. Therefore, you wouldn't send out a large-group email to 100s of customers telling them to hold securities unless you were sure that was a suitable recommendation for every recipient on the list.

Good news, not telling someone to sell a stock that you once recommended is not the same thing as a "hold" recommendation. A hold recommendation is an explicit recommendation to hang onto a particular securities investment.

Since a "hold" recommendation would not lead to a commission, I can't think of a good reason to send one out. Can you?
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US Treasury also Issues FRNs or Floating-Rate Notes

Even though buying a 2-year US Treasury Note was never a big risk, investors did face the risk of watching interest rates rise right after they buy. Buying new T-Bills every single week at auction is totally impractical for retail investors. Luckily, the Treasury now sells a floating-rate debt security whose interest rate re-sets each week based on the yield established through the weekly T-bill auction. Investors now don't have to worry if interest rates go up each week if they own a Floating-Rate Note, or FRN, since investors will receive whatever rate is established each week for 13-week Treasury Bill yields. The key facts on Floating-Rate Notes or FRNs include:

• Interest payments on FRNs rise and fall, based on discount rates for 13-week bills.
• FRNs are sold in increments of $100. The minimum purchase is $100.
• FRNs are issued in electronic form.
• You can hold an FRN until it matures or sell it before it matures.
• In a single auction, a bidder can buy up to $5 million in FRNs by non-competitive bidding or up to 35% of the initial offering amount by competitive bidding.

Floating-Rate Notes or FRNs provide liquidity and protection against capital risk/default risk, and interest-rate risk.

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SEC Announces securities fraud charges against the state of Kansas!

First, let's see the press release from the Securities and Exchange Commission's website:
Washington D.C., Aug. 11, 2014 — The Securities and Exchange Commission today announced securities fraud charges against the state of Kansas stemming from a nationwide review of bond offering documents to determine whether municipalities were properly disclosing material pension liabilities and other risks to investors. According to the SEC’s cease-and-desist order instituted against Kansas, the state’s offering documents failed to disclose that the state’s pension system was significantly underfunded, and the unfunded pension liability created a repayment risk for investors in those bonds. 
At first, this kind of headline might confuse someone studying for the Series 7. After all, aren't municipal securities exempt under the Securities Act of 1933 and the Securities Exchange Act of 1934? Yes, and yes. However, that just means they don't have to file registration statements with the SEC under the Securities Act of 1933 and don't have to file those annoying 10Q, 10K, and other reports that companies like SBUX and MCD have to under the SEA of 1934. Municipal securities are still securities and all securities are subject to anti-fraud statutes in the securities laws at both the federal and state level. Note that I didn't say every-thing is subject to the securities laws' anti-fraud statutes. I said all securities are. A fixed annuity is not a security, but a municipal bond or a Treasury Bond is still a security that is simply exempt from registration requirements. Big difference. The SEC already busted the chops of the State of IL, who has already implemented changes that involve making their own even worse pension fund situation clear to those buying their bonds. Kansas will likely follow suit, as they need to borrow money as much or more than any other state. Last thing they need is the SEC getting a federal court to prevent the State from issuing any bonds at all until they get their act together.Need help with your Series 7 exam?

Morgan Stanley Profits Surge 56%

As an investor, I look for consumer discretionary companies that do one thing really well (Krispy Kreme, Starbucks, McDonald's) or financial companies that make money from many different lines of business (TD Ameritrade, Wells Fargo). My investment in TD Ameritrade (AMTD) has been outstanding--up around 90% in about a year--and, fortunately, it happened right after I decided to take much larger stakes in a few companies' stocks as opposed to spreading a little bit of money among several dozen. I mean, if you're not comfortable investing $10,000 into a stock, why "play around" with $400? If it drops, it drops the same % for everybody, and if you happen to hit a double or triple, where are you on a $400 investment compared to an investment of $10,000? Reading the WSJ online article announcing Morgan Stanley's recent surge in income and profits, I noticed that broker-dealers can make money in many different ways. They can underwrite securities. They can open an affiliated wealth management firm. They can trade securities for big profits. And, of course, they earn commissions whenever their customers want to trade, which is often. All along the way, they earn bazillions on unused customer cash, which is largely why I bought so many shares of TD Ameritrade when interest rates were low--as rates rise, AMTD will make more money. Unless they don't. In any case, here are some highlights from the WSJ Online article: Morgan Stanley's net income rose to $1.51 billion from $962 million. On a per-share basis, which reflects the payment of preferred dividends, the firm earned 74 cents, or 68 cents excluding accounting adjustments. Analysts polled by Thomson Reuters had expected adjusted earnings of 59 cents a share. Revenue rose 10% to $8.93 billion. Excluding accounting-related adjustments tied to the firm's own debt prices, revenue increased 4% to $8.8 billion, exceeding analysts' average estimate of $8.52 billion. Not too bad, huh?

Series 7 Sample Question: Taxation

Series 7 exam candidates scour the web for Series 7 exam sample questions. Let's take a look at the kind of question you might see on your Series 7 exam: Which of the following statements accurately explains an investor's "marginal tax rate"? A. It is the rate applied to qualified dividends and long-term capital gains B. It is the rate of tax paid on the last dollar of income earned C. It is the rate applied to all of the investor's ordinary income for the year D. It is the average rate of taxes paid, calculated by dividing taxes paid by taxable income EXPLANATION: as always, take whatever you are given in the question and use it to eliminate answer choices. Choice A is trying to confuse you--investors might pay 15% or 20% (or even 0%) on qualified dividends and long-term capital gains, but they don't pay their marginal rate. A is eliminated. B looks good, but let's make sure. Choice C doesn't have it right, either--if somebody makes enough money to be pushed into the 33% bracket, that rate only applies to some of his income. C is eliminated. And, Choice D is defining the investor's effective tax rate. Choice B is the answer. An investor who tops out in the 33% bracket also pays 10, 15, 25, and 28% on various swaths of his income. He pays 33% on the "last dollar of income earned."

Can My Broker-Dealer Stop My Customers From Following Me to My New Employing Member Firm?

Can your employing broker-dealer prevent you from bringing your customers with you to your new employing member firm when you leave for a better opportunity? Yes. Can your employing broker-dealer stop your customers from transferring their account to your your new employing member firm? Absolutely not. See the difference? As FINRA explains perfectly in a Notice to Members, "As a condition of employment, certain members require their registered representatives to sign employment contracts in which each registered representative agrees that when he or she leaves the firm, he or she will not take, copy, or share with others any firm records. In addition, the registered representative may agree that, for a certain period of time following his or her departure from the firm, he or she will not solicit the firm's customers for business. Nonetheless, when a registered representative leaves his or her firm for a position at a different firm, clients serviced by the registered representative may decide to continue their relationship with the registered representative by transferring their accounts to the registered representative's new firm." The specific rule that prohibits interference with a customer's decision to transfer the account in such cases is FINRA 2140. Since you wouldn't otherwise be able to sleep tonight, I'll go ahead and reproduce that rule for you here: No member or person associated with a member shall interfere with a customer's request to transfer his or her account in connection with the change in employment of the customer's registered representative where the account is not subject to any lien for monies owed by the customer or other bona fide claim. Prohibited interference includes, but is not limited to, seeking a judicial order or decree that would bar or restrict the submission, delivery or acceptance of a written request from a customer to transfer his or her account." So, if you leave your firm for greener pastures, please do not violate your employment contract by poaching customers or--probably worse--walking out with their account information on a little thumb drive. But, if your customers decide to move their account when you make your move, your firm cannot play hardball with them and try to interfere with an ACAT transfer.

How Are Dividends Taxed?

When I log into my taxable brokerage account, I look up the dividends paid so far this year, and I find the following: NATURAL RESOURCES ROYALTY (HGT) $8.28. QUALIFIED DIVIDEND (MCD) $12.15. Notice there are different types of dividend income payments. As with dividends from REITS, the natural resources royalty paid by Hugoton Royalty Trust does not receive the qualified dividend treatment that the dividend from McDonald's does. Qualified dividends paid by most public companies like McDonald's, Starbucks, General Electric, etc., receive a special tax treatment that is usually much lower than the investor's marginal rate. Most investors, like yours truly, get to pay just 15% tax on qualified dividends. On the other hand, if the investor's marginal bracket is 33%, he would keep only 67% of an ordinary dividend paid by a REIT or a natural resources royalty paid by a royalty trust. However, if the investor's marginal bracket is 39.6%, he also gets nailed with a 20% tax on qualified dividends--not 15%. So, while most investors pay 15% on qualified dividends, the wealthiest investors now pay 20%. And, investors whose marginal bracket is no higher than 15% pay a tax rate on qualified dividends of . . . zero percent. What does any of this mean to an investor? Well, if he's only getting $12.15 quarterly from Micky Dee's, not much. But, if he were receiving $120,150 quarterly on top of a decent salary, that would push him into the 39.6% bracket, and he'd be keeping 80%, not 85% of that income. How much difference would that 5% make? Enough to buy his daughter a new baby-blue Subaru. Real money. To Mitt Romney, it means no more 13.7% tax rate. He'll continue to live mostly on qualified dividends, but that will start him out at 20%, not the kinder, gentler, 15%. Again . . . real money. One thing is clear, when Democrats call the new tax code changes a "tax on millionaires and billionaires," we now see how dubious the claim is. First, the 39.6% marginal bracket and the associated 20% tax on dividends kicks in on the income above around $400,000 a year--is that anyone's definition of a "millionaire-and-billionaire"? Also, the true millionaires-and-billionaires out there can, like Mitt Romney and Warren Buffett, live mostly on qualified dividends, so that whole 39.6% marginal bracket is meaningless--you can bump it up 5 points, but they're still paying 20% or less on their dividend income. When the tax-hiking Democrats change the tax code like this, they end up hitting folks in the middle brackets much more. Folks living paycheck to paycheck don't receive a lot of dividend income, so when politicians push the "millionaires and billionaires" up to higher brackets, the folks below them get pushed up, too. Since they live paycheck-to-paycheck, bumping the rate they pay on that income hits them square in the face. Because of the 15% tax on my qualified dividends, I now fund my taxable account regularly, the way most people fund their IRA. In addition to my SIMPLE IRA contribution, I make sure to put more and more $ into my taxable account, where I try to buy mostly dividend-paying stocks. By the time I retire, I hope to collect a decent income stream on these dividends and keep 85% of it. And, if I sell any stocks for a long-term capital gain, I keep 85% of that, too. While it's nice to build up the SIMPLE IRA, all withdrawals from there will be taxed as ordinary income. So, as you can see, the changes to the tax code make the taxable brokerage account something worth considering in addition to true retirement accounts.

Suitability of Investment Recommendations - Free Online Class

Suitability of recommendations is an important part of your Series 7 exam. Use the link at the end of this brief post to sign up for a FREE class starting in just a few hours. We'll break down 10 practice questions similar to what will show up on your test, and we'll dig into key concepts including: time horizon, liquidity needs, investment objective, and risk tolerance as they relate to various investment vehicles. Sign up now!

How to Calculate Tax-Equivalent Yield for a Series 7 Question

When an investor has found two 10-year bonds, both rated A-, should she invest in the 6% tax-free municipal bond or the 8% taxable corporate bond?

The answer depends entirely on her marginal tax rate. A test question could go something like this . . .

When deciding between a 6% tax-free bond and an 8% taxable bond, at which marginal bracket does an investment in the tax-free bond become advantageous?

A. 20%

B. 25%

C. 30%

D. 33%

In order to figure out the tax rate that first makes the 6% bond more attractive, you''ll have to keep taking the .06 the bond pays and divide it by .80, then, .75, then .70, and maybe even .67 until the tax-equivalent yield ends up higher than 8%. What happens when we take .06 divided by .75? We get a tax-equivalent yield of .08, which is exactly the same as what the corporate bond offers. Not surprisingly, when we take .06 and divide it by .70 (30% marginal bracket), we find that the tax-equivalent yield is now 8.57%, making C our answer. Yes, at 33% the investor should also be buying the municipal bond, but the question asked at which bracket the yield begins to rise above 8%. As always, the Series 7 expects you to do more than memorize a few terms and try a few little tricks to fudge your way through it.Pass your Series 7

The Often Overlooked Unit Investment Trust

Most Exchange-Traded Funds (ETFs) are set up as unit investment trusts that are only redeemable into large "creation units" by the broker-dealers who sponsor them. Everyone else trades the shares, which seek to mimic the performance of a particular index. That's all well and good, but the UIT that intrigues me is the fixed portfolio of preferred stock or bonds that has no investment adviser and, therefore, no management fee. A portfolio of, say, 50 preferred stock issues is purchased and placed in trust overseen by the trustee, who pays out the income produced by the securities in the portfolio after trustee and administrative fees have been deducted. Your exam might refer to such a UIT as a "supervised, non-managed portfolio, typically of fixed-income securities." That's exactly what it is, and since I'm pretty sure that trading in and out of preferred stocks is both expensive and unnecessary, I see no reason to pay an investment adviser to manage/trade the portfolio.
So, what's stopping me? Interest rates. Yields are still so low at this point that I can't get excited over parting with a large chunk of change just to watch 2-3% yields dribble in. I've told myself that when I can get a 5% yield or higher, I will start buying in. As your test wants you to know, my risk is that interest rates will keep climbing after I buy in--the value of my units will drop if that happens. Then again, I would still be collecting a decent yield from preferred stock, and I can check the credit quality of the issues and let the trustee handle it from there.
A likely test question on a UIT would point out that these securities are primarily regulated under the Investment Company Act of 1940.Need Help with your Series 7?

Traditional IRA or Roth IRA?

Even though individuals have until the tax filing deadline next April to make all of their contributions to a Traditional or Roth IRA, really it would be wiser to start thinking about that stuff now, before the holiday spending begins. Which one is best for you--Traditional IRA or Roth IRA?
Depends.
Do you make a decent six-figure income? If so, the Roth is not an option. If not, however, the Roth IRA is a great option for people who want to put away some money now that will come out tax-free in retirement. So, basically, if you have a job and are making less than $100,000 your tax planner will likely concur that you can make your maximum contribution to a Roth IRA--at least $5,500 currently.
Are you covered by a retirement plan at work? If not, you could instead fund a Traditional IRA, and it doesn't even matter how much money you make. Seriously. If you work for a n employer with no retirement plan, you can almost certainly maximize and deduct your contribution to a Traditional IRA. As always, check with a CPA first.
Just yesterday I was talking to a woman who is 59 and has very little saved up for retirement. After an extended set-back after losing a job and then taking a new one that paid about 1/2 of what she used to make, she is about to get re-hired by a good company with a 401(k) plan. In order to catch up, she needs to maximize her 401(k) option, which would let her put aside up to around $20,000 between her and her employer's contributions. Since she'll never earn $100,000, she can also take advantage of a Roth IRA. The Traditional IRA for her is not attractive, as her 401(k) participation plus her income level (around $70,000) will remove her ability to deduct a contribution to a Traditional IRA.  She could  put an after-tax contribution into a Traditional IRA, but I see no reason to do that, not when her income is well south of the cut-off for Roth contributions. Need help with your Series 7

But, How Do I Take the Series 7 Exam Itself?

Any textbook worth its salt lists the terminology tested on your exam. Most explain most of the main concepts reasonably well, depending on how much time you have for re-reading and highlighting.

Regardless, what few vendors do is show you how to take the series 7 exam itself--how to deal with the challenging questions. How do you take all those words and numbers you memorized and apply them to questions that are often trying to mislead you?

If you need help working practice and exam questions for the Series 7, you simply have to get our $49 access to test-taking skills lessons. For just $49, you get access to over 25 recording sessions that break down 10 unique practice questions step-by-step. Hit PAUSE to do the question. Hit PLAY to watch us break it down for you.

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Series 7 Online Classes Starting Soon

It has come to my attention that most people studying for the Series 7 could use a little help from a structured class. They need a schedule to stick to. They need a time and a place they have to be, or else. That's why we've set up a seven-week online class schedule launching September 10th allowing you to take in key Series 7 information in small, digestible bites. With the ability to watch the material again if you need, and--best of all--to participate in live Q & A sessions with the author of Pass the 7, me.

Classes will run two or three times a week at 12 noon Central for about 90 minutes. The final 30 minutes will be the live Q & A with the author, me, R Walker. To see the schedule and get on the bus, please click this link:

http://www.examzone.com/ezQuickCalendar

Examzone and www.passthe7.com are one-in-the-same, by the way. Examzone focuses more on corporate accounts while www.passthe7.com focuses on the end-user. Either way, hope to see you online, soon.

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FINRA Rules on Communications

FINRA is forever tweaking the definitions used for the communications put out by a member firm. A few years ago, I had to put serious effort into explaining how sales literature differed from advertising, and all the special rules on public appearances and independently prepared reprints. Going forward, FINRA only wants to work with three specific categories of communications: correspondence, retail communications, and institutional communications. Of these, only retail communications are subject to prior principal approval and filing copies with FINRA. Correspondence and institutional communications have to be monitored, and principals need to make sure that these communications are not misleading. They just are not subject to the heightened supervision of communications going out to > 25 retail investors. It is a little strange to see FINRA rely so heavily on this arbitrary number 25, but they do. The exact same thing--a seminar handout, for example--is correspondence if delivered to 25 or fewer retail investors but becomes a retail communication if delivered to more than 25. What we used to call advertising and sales literature is now either correspondence or retail communications depending on how large the audience is. FINRA also no longer cares whether the communication goes to an existing customer or a prospect--again, the number 25 is suddenly the determining factor. Pass Your Series 7 Exam

Mini-Options

The CBOE is rolling out some new "mini-options" allowing investors to buy contracts that cover just TEN shares . . . for the really high-per-share-priced stocks including AMZN, APPL, GOOG, SPDR Gold Trust, and the good ole SPDR S&P 500. Ordinary options use a multiplier of 100, of course, but these mini-options use a multiplier of ’10.' The #7 at the end of each stock symbol denotes ‘Mini,' so, the mini-option might look like this: AMZN7 or APPL7. A customer who owns just 40 shares of APPL could now hedge by writing 4 APPL7 mini-options (4 X 10 = 40 shares). Always innovating, this industry. Series 7 Tutoring Available Here

Series 7 Exam Sample Question: Mutual Funds

Don't forget that while the Series 7 exam asks many questions about options and debt securities, it also asks many questions about other topics. And, often these other topics can yield some pretty challenging and tough series 7 exam questions. Like this one:


A summary prospectus for a mutual fund states that the public offering price (POP) is $10.50 with the net asset value (NAV) at $10.00. The document also states that the sales charge is less than 5%. Which of the following could explain this?
a.Sales charges are expressed as a percentage of the net amount invested.
b.The summary prospectus is unaudited and frequently includes estimated figures.
c.Sales charges are expressed as a percentage of the gross amount invested.
d.Some investors may have purchased shares at lower sales loads through quantity discounts.

Explanation: the exam is expert at asking questions in ways you weren't quite expecting. Maybe you've done dozens of questions that simply asked you what the formula for calculating the sales charge percentage is, or maybe you've been running the calculations so many times you forgot to learn what it was you were calculating and why. As always, ask yourself what the question is telling you that allows you to eliminate at least one of the four answer choices. Unfortunately, this question gives you nothing that is obviously wrong at first glance. Maybe the document IS unaudited? Investors DO often purchase shares at a lower sales charge through breakpoints/quantity discounts. And, if you've never encountered the phrase "expressed as a percentage of the net/gross amount invested," you can easily panic and convince yourself there is just NO WAY TO GET A QUESTION LIKE THIS RIGHT.
Sure there is. Look at each answer choice more closely. The fact that SOME investors might have bought at lower sales charge percentages would hardly be a good reason for the mutual fund to quote their a-typical experience, right? Shouldn't this document use the maximum sales charge? Yes, and, even if we thought this might be the explanation, we have to keep thinking until we recall that some investors have all sales charges waived--usually at about $1 million--so Choice D wouldn't work even if we went down that path. Choice B bugs me, too--how about you? I mean, the American Balanced Fund, for example, had assets of around $50 billion last time they reported--would it be so hard for a fund that size to break out a calculator and tell us exactly what the sales charge is? Estimated figures? I think you can eliminate that one. Now, if you're not comfortable with the language used in Choice A and Choice C, you just have to interpret--the gross amount is the total amount one pays--the net amount is what's left after the distributors take out the sales charge. So, even if you weren't sure before the question, you can crunch a few numbers and prove what the answer is. If we take 50 cents divided by the net amount invested, the NAV, the % would be 5%. But, if we--properly--divided the 50 cents by the gross amount invested, the POP, we would get a figure of under 5%. Making Choice ______ the correct answer.
Right?






Answer: c  Need Help with your Series 7?