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Series 66 > Investment Advisory Practices > Flashcards

Investment Advisory Practices Flashcards

1
Q

What is not pertinent when opening an account, a client’s educational or financial background?

A

Educational background

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2
Q

If a client gives little information when opening an account, what securities may an agent recommend to the client?

A

Only securities that are suitable based on the information the client did provide

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3
Q

What is soft-dollar compensation?

A

Non cash compensation paid by a BD to an IA for directing securities transactions.

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4
Q

What forms of soft-dollar compensation are acceptable?

A

Research reports, seminars, software used to provide analysis

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5
Q

What forms of soft-dollar compensation are NOT acceptable?

A

Rent, travel expense reimbursement, hardware, furniture, entertainment, meals

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6
Q

True or False: IAs have a fiduciary responsibility to clients and must obtain best execution on directed transactions.

A

True

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7
Q

True or False: Under the Uniform Prudent Investor Act (UPIA), an IA’s main objective should be risk avoidance.

A

False. The UPIA indicates that advisers are responsible for managing risk, not avoiding risk.

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8
Q

IAs have greater responsibility to their clients than BDs. This is referred to as the IA’s ___________ responsibility.

A

IAs have greater responsibility to their clients than BDs. This is referred to as the IA’s fiduciary responsibility.

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9
Q

True or False: A mutual fund asset allocation program requires a special wrap program disclosure document.

A

False. These programs charge a percentage of assets to manage a portfolio of no-load mutual funds.

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10
Q

Identify the acronym: UPIA

A

Uniform Prudent Investor Act

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11
Q

Describe a soft-dollar arrangement between an IA and a BD.

A

An IA directs client transactions to a specific BD in return for research and brokerage services.

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12
Q

To be allowed, a soft-dollar arrangement must benefit ____________.

A

To be allowed, a soft-dollar arrangement must benefit the client.

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13
Q

Identify some permissible uses of soft-dollar arrangements.

A

Soft dollars are permitted for obtaining research reports, software, and fees for attending conferences/seminars.

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14
Q

What are some of the examples of items that cannot be covered by a soft-dollar arrangement?

A

Advertising, travel expense reimbursement, meals and entertainment, and computers

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15
Q

True or False: An agent must always have reasonable grounds for recommending a particular security.

A

True

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16
Q

True or False: If a conflict of interest exists, an IA must always terminate a relationship with a client.

A

False. An IA must always disclose a conflict, but they don’t necessarily need to end the relationship.

17
Q

What duties does an IAR have according to the “know your customer” rules?

A

Make a reasonable inquiry into a customer’s background and provide suitable advice based on known information.

18
Q

Define wrap account.

A

A managed account that charges clients an annual fee to cover trading, research, and advisory services

19
Q

True or False: A fiduciary’s duty includes ensuring that all investment advice is impartial and disinterested.

A

True

20
Q

In what type of arrangement may an IA acquire research reports without paying for them directly?

A

In a soft dollar arrangement, an IA may acquire research reports without directly paying the BD.

21
Q

Is office furniture (e.g., a desk chair) included in an IA’s net worth?

A

Yes, provided it is fully owned by the IA.

22
Q

True or False: Under the UPIA, an adviser should never recommend speculative investments to conservative investors.

A

False. Risk should be managed, not avoided. Speculative investments (e.g., options and commodities) may reduce overall risk.

23
Q

In what type of account is reverse churning most likely found?

A

A fee-based (wrap) account

24
Q

Define fiduciary.

A

A person who acts on behalf of another, which gives rise to a relationship of trust and confidence.

25
Q

List some examples of fiduciaries.

A
  1. IARs,
  2. executors of estates,
  3. custodians of UTMA/UGMA accounts,
  4. trustees, and
  5. pension plan administrators
26
Q

May an IAR recommend that a client meet/speak with another financial professional?

A

Yes. If an IAR lacks expertise in a certain area (e.g., insurance), it is acceptable to recommend outside assistance.

27
Q

What document is required for an IAR to be authorized to pay his client’s bills?

A

A full power of attorney

28
Q

The key feature of the Modern Portfolio Theory is its emphasis on what?

A

The trade-off between risk and reward.

29
Q

Some criteria regarding prudent investing found in the Uniform Prudent Investor Act includes what? 4

A
  1. The standard of prudence applies to the entire portfolio. rather than on an investment-by-investment basis.
  2. A central consideration for a fiduciary is the trade-off between risk and reward.
  3. Categorial restrictions on specific types of investments have been removed; therefore, any investment may be appropriate as part of a portfolio designed to achieve specific goals.
  4. The recognition of the explicit need for diversification in a portfolio.
30
Q

Under the UPIA, all fiduciaries should do what? 5

A
  1. Pay close attention to their clients’ goals
  2. Determine their clients’ risk tolerance
  3. Develop an appropriate investment policy/strategy
  4. Focus on the management of risk, not the complete avoidance of risk
  5. Diversify appropriately.
31
Q

What specific obligations has the SEC indicated that an adviser assumes when they begin a fiduciary relationship? 4

A
  1. Being loyal to clients
  2. Having reasonable and objective basis for investment advice being provided
  3. Ensuring that investment advice is suitable based on the client’s objectives, needs, and circumstances
  4. Obtaining the best execution for its client’s securities transactions when in a position to direct brokerage transactions.
32
Q

What three conditions must be met for a soft-dollar arrangement to be acceptable?

A
  1. The advisor must be exercising investment discretion over the accounts of others.
  2. The broker-dealer must provide the adviser with services that assist the adviser in making investment decisions for client accounts.
  3. The adviser must determine that the value of these services is reasonable in relation to the commissions being charged by the brokerage firm

Series 66 (12 decks)

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