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Series 7 Top Off questions with 100% correct answers graded A+
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Series 7 Top Off questions with 100% correct answers graded A+
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Series 7 Top Offknow your customer (3 main sections- financial factors, personal characteristics, financial
objectives/investment goals) - correct answer ✔✔1) financial factors - includes income (earned,
invested, retirement), tax considerations (tax bracket, g/l/estate/gift taxes), financial situation (balance
sheet)
2) personal characteristic - age, time horizon, investment experience, risk tolerance, social values
3) financial objectives/investment goals - cash reserve, preservation of capital, liquidity, current income,
growth, college funding, retirement funding, tax relief, speculation
KYC - 1/3 financial factors (income, tax considerations, financial statement) - correct answer ✔✔- income
(earned, investment, retirement)
- tax considerations (tax bracket, g/l, estate/gift taxes)
- financial situation - balance sheet/income statement
- identify all sources/amounts of income (salary, investment income, other income), document
expenditures (taxes, mortgage, loan, living expenses, insurance, entertainment, travel, etc) this will allow
you to determine discretionary income (what is left, if any to invest)
- taxes:
-marginal tax bracket, can they qualify for AMT (alternative minimum tax)
- investment income --> do they have dividends/interest that are taxable? at what levels?
-estate/gift taxes --> up to 15k per person per year or up to 30k per married couple without penalty.
unlimited gifts allowed from spouse to spouse.
-capital gains/losses: ST= pay income tax level (held under a year), LT=held over a year, taxed at max of
20% or if in lower tax bracket, lower. can use losses to offset gains, and up to 3K on ordinary income
KYC 2/3 - personal characteristics/non financial info (what is the formula to determine what % of equities
you should have in your portfolio based on your age?) - correct answer ✔✔- age:
-younger=can accept more risk/longer earnings period, want to build capital, more recovery time for any
losses.
,-old=preserve income/capital to use for retirement=less aggressive overall.. don't want to lose nest egg
time horizon:
100-age=equity=% of portfolio that should be devoted to equities (more capital appreciation), comes
with increased risk but good with offsetting inflation (hedging). younger=higher equity % and vice versa.
investment experience:
-if they have a lot, they are going to have a better idea or risk/may be more willing to be speculative,
they may have more products available to them
-if inexperienced, may need to gear them toward different ones, may need to take basis steps like
starting to save for retirement, etc.
social values:
-may not want to invest in certain companies if they feel strongly about certain laws/environment, etc.
risk=odds of losing 100% of investment
- risk tolerance=not just based on financials but also on values/attitudes=are they comfortable losing
money
- young/single=may want more risk, can be more aggressive, longer investment term
-young married couple = more conservative but still want growth, may be investing for child's college
savings so still aggressive
- older=likely want to preserve earnings for retirement, want income/capital appreciation
KYC 3/3 - financial objectives/goals - correct answer ✔✔- safety: likely very old or very young (little
discretionary income) who want this. they should invest in gov't securities
- short term (capital preservation): protect principal, likely money market instruments are best
-income: (typically retired people): reliable stream of cash, income funds or bonds are good choices
- growth/income: less volatile, less earnings, usually blue chip companies are good choice=regular
dividends
-long term growth: greater volatility, may just be starting out, aggressive bc want to begin saving for
retirement etc.
- aggressive growth: may have reliable income, etc 'and can take this risk on --> penny stock/options
,- speculation: active, short term speculation
-reduced/defer taxes= look to save taxes, usually high net worth clients, they can put money in
retirement vehicles to defer payments, muni securities (often times are exempt at state/local level if
bought in your own resident area), may want to interest tax losses to offset gains
short term capital gain vs long term - correct answer ✔✔ST: held for less than 1 year, pay income tax
level
LT: 20% max or if in lower tax bracket, you will pay that, held for longer than 1 year
-capital losses are used to offset capital gains and a max of 3K to decrease ordinary taxable income
t/f ex - investor profile - correct answer ✔✔1) 40 yr old should consider her portfolio to consist of 50-
60% equitities (100-age=%) so 100-40=60%, T
2) older couple with sufficient retirement income will likely be aggressive with investments (F) do not
want to sacrafice nest egg for potential $ opportunities)
3) indiv. concerned with labor practices in other countries may avoid investments in emerging markets
(T)
4) couple saving for college will be very conservative/safe with investments (F) - can't be too
conservative, need growth but not overly safe
Suitability (also inst. suitability) - correct answer ✔✔- based on client profile when the acct is opened
- ongoing situation, not just at acct opening, day to day changes, very liquid (always moving)
-applies to recommended transactions and investment strategy
-RR cannot place an interest ahead of the client (churning for ex=doing a lot of activity to generate
commission that does not generally benefit the client)
- not determined if it makes/loses money= not about g/l at all
inst suitability: can often take more risk/make own decisions = less suitability worries/obligation bc
increased capability of evaluating investment risk
-inst usually signs dpc saying they can use independent judgement=don't need to rely on RR
, FINRA suitability rules (3 obligations) - correct answer ✔✔- RR/firm must have reasonable basis to
believe that
1) reasonable basis obligation -= firm making reccommendation should believe it's suitable for some of
its investors
2) customer specific = suitable for certain clients and not others (doesn't apply to inst)
3) quantitative obligations = just bc it is suitable for a specific client doesn't mean they can buy/sell
unlimited amounts
- focusing on one type of suitable investment could be too much or the number of trades within a
suitable investment are what is making it unsuitable. so all may be suitable but the sheer number of
trades/transactions may not be, so must evaluate all 3
verifying net worth/sophistication - correct answer ✔✔certain investments have min requirement for
net worth, earnings, sophistication. can be offered to retail clients but usually in limited numbers
-SEC has suggested following methods to verify customer standing:
- review previously filed IRS tax forms
-review bank/brokerage account statements
- obtain written verification as to customers accredited status from b/d, investment advisor, etc.
**(SEC doesn't require these to be used, but does require reasonable attempt to be made to determine
if investor status has been verified before recommending)
** just because was suitable at some point does not mean that it is suitable now
** just because was invested in before does not mean suitable for today
investment analysis tools (the tools, and 2) what are the firm requirements in terms of disclosures and
then when does FINRA need to have access and when not) - correct answer ✔✔1) tools: simulates
outcomes and their statistical liklihood or different investments (hypothetical outcomes) or strategies
2) firm requirements: in order to provide tool to investors, must first explain disclosures that they are
projected in firms investment tool and
- criteria, methodology, tools limitations
- results may change overtime/from use to use
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