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

A billion here, a billion there

JP Morgan posts a loss of $2 billion? Where is a "net loss" recorded? On the company's income statement or statement of earnings. Note that internally these are often called Profit & Loss statements, and $2 billion is a pretty big loss, even for a behemoth bank like this bad boy. How does it affect the value of the company's stock? Immediately, and not in a good way. To stretch a bit and build some links between the test world and real world, check out http://money.cnn.com/2012/05/11/markets/jpmorgan-faq/

Get HELP with your SERIES 7 EXAM HERE.

Insider Trading, SEC goes after bottling company executive

The Securities Exchange Act of 1934 prohibits fraud and manipulation in the stock markets. One way the markets are manipulated is through insider trading. To many folks, this violation might seem like a victimless crime, but the federal government has long held that the financial markets affect the banking system, the economic stability of the nation, even the amount of taxes collected by the Treasury and, therefore, they must be protected against abuses. Insider trading is fraudulent. That might not sound right at first, but think about it--the handful of people with confidential information have an unfair advantage over all shareholders and other investors. They are considered fiduciaries to the shareholders, who must put the shareholders' needs first. Since that can't happen if the information is used to make a secret illegal trade, the person possessing the information has to abstain from passing around or using it.

But, humans being humans--and usually men being men--some people will sign non-disclosure agreements with their employer's attorneys and ignore emails from said attorneys warning them not to trade in the stock until further notice, all for an illegal profit of 80-some thousand bucks. So, if you know your employer is about to make a huge acquisition valued internally at some $800 million, and the announcement will maybe push up the company's stock price 30%, is it tempting to buy shares in your wife's account ahead of the announcement? Sure. Could you get by with it? The guy in the link below probably thought he could. Now, he knows better. He'll never be an executive at ANY public company if the SEC has their way. He'll give all the money he made back plus interest. And, he'll pay a financial penalty that will seem big even to a wealthy executive. Check it out--this will help you understand a few test questions a little better.

And maybe keep you out of court rooms and prison cells.

http://www.sec.gov/news/press/2012/2012-40.htm?utm_source=twitterfeed&utm_medium=twitter

Series 7 Practice Questions

Is it possible to pass your Series 7 exam without reading a textbook? Of course. Is it probable? Of course not. A well organized and written textbook will contain the many details you'll need to be familiar with and introduce you to all the vocabulary terms the test will expect you to know.

But, really, the key to passing the Series 7 exam is to take and learn from a good set of practice questions. I don't mean that you should simply bang out questions and track your score. I mean, you need to use the practice questions to learn the material. For example, our Pass the 7 ExamCram Online Test Prep provides a helpful rationale to each question so that you can LEARN as you improve your testing skills. Take notes on these rationale. Try to imagine the many variations that could be written on this question.

First time I took the Series 65 I did nothing but practice questions--I simply popped in the CD (hey, it was the early 2000's), expected to miss the questions first time through, then took notes based on the rationale. Of course, I was already a Series 7 and 63 instructor, so that was a perfectly fine way for me to study. For most people, the process should probably involve reading the textbook chapter-by-chapter. After each chapter, take the associated quizzes in ExamCram and--again--take notes based on the rationale. If you have the DVD set, watch the corresponding sessions now, and you will be amazed at how well you suddenly know options, bond yields, DPPs, what have you. Once you've read the book and done the section quizzes, move onto the practice finals, trying to get at least a 75%.