Series 65 practice questions with answers

Answer: B) Rise

• AIncorrect. Yields usually rise.
• BCorrect. Investors demand compensation for lost purchasing power.
• CIncorrect. Yields respond.
• DIncorrect. Yields usually rise.

Answer: A) Crowding out

• ACorrect. Government demand for credit competes with business.
• BIncorrect. That's Fed bond buying.
• CIncorrect. That's slow growth with inflation.
• DIncorrect. That's falling prices.

Answer: B) Can't call the bond

• AIncorrect. The opposite.
• BCorrect. It protects investors from early redemption.
• CIncorrect. Interest is still paid.
• DIncorrect. That isn't the feature.

Answer: A) Treated as a return of premium and not taxable until they exceed premiums paid

• ACorrect. They aren't like stock dividends.
• BIncorrect. They aren't stock dividends.
• CIncorrect. They aren't guaranteed.
• DIncorrect. They can be paid while the insured is alive.

Answer: C) It is included in income as ordinary income, with no additional tax

HSA money not used for qualified medical expenses is taxable income. After age 65, disability or death, the 20% additional tax no longer applies, so the money is taxed like a traditional IRA distribution.

• AIncorrect. Only distributions used for qualified medical expenses are excluded from income. Reaching 65 removes the additional tax, not the income tax.
• BIncorrect. The 20% additional tax doesn't apply to distributions made after the account holder reaches age 65, becomes disabled or dies.
• CCorrect. The money wasn't used for qualified medical expenses, so it is taxable income. Because she is over 65, the 20% additional tax doesn't apply.
• DIncorrect. A non-qualified HSA distribution is taxed as ordinary income, not at capital gains rates.

Answer: B) Short-term debt

• AIncorrect. That is an equity fund.
• BCorrect. They aim for stability and liquidity.
• CIncorrect. That is a high-yield fund.
• DIncorrect. That is a REIT.

Answer: A) Each spouse holds an equal one-half interest in the account

In community property states such as Texas, property acquired during the marriage, including either spouse's earnings, is generally owned one-half by each spouse, regardless of how the account is titled.

• ACorrect. Texas is a community property state. Property acquired during the marriage while domiciled there, including salary earned by either spouse, is generally community property, and each spouse owns a one-half interest.
• BIncorrect. In a community property state, an account titled in one spouse's name is still generally community property if it was funded with income earned during the marriage.
• CIncorrect. A survivorship designation controls what happens when an owner dies. It does not create the wife's ownership interest, which comes from community property law.
• DIncorrect. Splitting ownership by contribution is not how community property works. Each spouse owns one-half of community property no matter which spouse earned the income.

Answer: C) Buy long-term care insurance, or a hybrid life insurance policy with a long-term care benefit

Medicare pays only for limited skilled nursing care and excludes custodial care, so a dedicated long-term care policy, or a hybrid life/LTC policy, is the tool for funding extended nursing home costs.

• AIncorrect. Medicare covers only limited skilled nursing facility care (up to 100 days). It does not cover unskilled custodial care with activities of daily living.
• BIncorrect. Medigap fills cost-sharing gaps in services Medicare covers. Because Medicare excludes custodial care, Medigap does not fund long custodial nursing home stays.
• CCorrect. Long-term care coverage is designed for extended care needs that Medicare and regular health insurance do not cover. A hybrid policy pairs that benefit with a death benefit.
• DIncorrect. Disability income insurance replaces earned income during working years. It is not designed to pay for custodial care later in life.

Answer: A) It records the client's return objectives, risk tolerance, constraints and target asset allocation to guide portfolio decisions

An IPS is the written plan for a client's portfolio. It covers objectives, risk tolerance, constraints and target asset allocation, and later decisions are measured against it. The brochure, the advisory contract and account statements are separate documents with different jobs.

• ACorrect. An IPS sets out the client's goals, risk tolerance, time horizon, liquidity and other constraints, and the target asset allocation. Managing, monitoring and rebalancing the portfolio are all measured against it.
• BIncorrect. This is what the Form ADV Part 2A brochure does. It describes the adviser, not the client's investment policy.
• CIncorrect. These terms belong in the investment advisory contract. The IPS deals with portfolio objectives and constraints.
• DIncorrect. This describes a periodic account statement. It reports past activity and does not set a policy for future investment decisions.

Answer: D) As ordinary income

• AIncorrect. Realized gains are taxed.
• BIncorrect. One year or less is short-term.
• CIncorrect. Gains are taxable.
• DCorrect. Short-term gains get ordinary rates.

Answer: B) Tactical allocation

• AIncorrect. That sets long-term targets.
• BCorrect. It is a short-term deviation from strategic targets.
• CIncorrect. That tracks an index.
• DIncorrect. That avoids active shifts.

Answer: A) An audited balance sheet for the adviser's most recent fiscal year

An adviser that requires prepayment above the threshold (more than $500 per client for state-registered advisers, $1,200 for SEC-registered advisers), six or more months in advance, must include an audited balance sheet in its brochure.

• ACorrect. Form ADV Part 2A Item 18 requires an audited balance sheet, prepared under GAAP, when an adviser requires prepayment above the threshold six or more months in advance. The threshold is more than $500 per client for state-registered advisers and more than $1,200 for SEC-registered advisers.
• BIncorrect. Item 18 requires a balance sheet showing the adviser's financial condition, not a tax return.
• CIncorrect. The required statement is a balance sheet, and it must be audited by an independent public accountant. An unaudited quarterly income statement doesn't meet the requirement.
• DIncorrect. Item 18 doesn't require a surety bond. Prepaying above the threshold triggers the audited balance sheet and financial-condition disclosures in the brochure.

Answer: A) Opt out of having their nonpublic personal information shared with nonaffiliated third parties

Regulation S-P requires firms to give customers a privacy notice and a reasonable chance to opt out before their nonpublic personal information is shared with nonaffiliated third parties. Exceptions include sharing needed to process transactions the customer requested.

• ACorrect. A firm may not disclose nonpublic personal information to nonaffiliated third parties unless it has given notice and the consumer has not opted out. Some exceptions apply.
• BIncorrect. Reg S-P lets firms share information as needed to carry out, administer, or enforce a transaction the consumer requested or authorized, without offering an opt-out.
• CIncorrect. The privacy notice is a firm obligation under Reg S-P. Customers cannot decline it.
• DIncorrect. Reg S-P has no opt-in requirement, and its opt-out right covers sharing with nonaffiliated third parties, not affiliates.

Answer: A) Misleading clients about their total costs, an unethical practice, because extra costs must be disclosed upfront

Wrap fee clients expect one bundled fee. Additional costs from trading away from the sponsor must be fully disclosed upfront, and failing to do so misleads clients about the true cost of the service.

• ACorrect. Wrap clients pay one bundled fee and don't expect to pay more. If trading generates added costs, those costs must be fully and clearly disclosed in advance. Failing to do so misleads clients about what they are paying.
• BIncorrect. Best execution may justify trading away from the sponsor, but it doesn't excuse hiding the extra costs. The adviser still has to disclose them.
• CIncorrect. A fee level that might be reasonable doesn't cure a failure to disclose. Undisclosed costs that contradict the brochure are misleading whatever their size.
• DIncorrect. The adviser chose to trade away and made the disclosures to clients. The adviser is responsible for its own misleading statements and fiduciary obligations.

Answer: A) Mutual funds

• ACorrect. It covers registered investment companies.
• BIncorrect. That's the Advisers Act.
• CIncorrect. That's banking law.
• DIncorrect. That's the 1934 Act.