Client/Customer Investment Recommendations and Strategies practice questions

Answer: B) 73

• AIncorrect. That isn't the RMD age.
• BCorrect. Later birth years start at 75.
• CIncorrect. That's the penalty-free age.
• DIncorrect. That was the old rule.

Answer: C) TIPS

• AIncorrect. Cash loses purchasing power.
• BIncorrect. Inflation hurts them most.
• CCorrect. Principal adjusts with inflation.
• DIncorrect. Fixed payments lose value.

Answer: A) Reverse churning

Putting an infrequent trader in a wrap fee account mainly to earn higher fees is reverse churning. It is the opposite of churning, which means trading too much to earn commissions.

• ACorrect. The SEC describes reverse churning as charging a client a wrap fee that covers advisory services and trading costs even though the client trades infrequently. A low-activity client ends up paying more than the services are worth.
• BIncorrect. Churning is excessive trading in an account to generate commissions, a breach of quantitative suitability. Here the problem is that there is too little trading for the fee charged.
• CIncorrect. Breakpoint selling means steering a mutual fund purchase to just below a sales-charge discount level so the client pays a higher load. It has nothing to do with wrap fee accounts.
• DIncorrect. Selling away means a representative sells securities outside the firm's supervision without its knowledge or approval. Nothing here involves an outside transaction.

Answer: A) Substantially equal periodic payments under Section 72(t)

• ACorrect. The schedule must continue for years.
• BIncorrect. That isn't an exception.
• CIncorrect. That isn't allowed.
• DIncorrect. IRAs don't allow loans.

Answer: A) Consider replacing it with a low-cost index fund that tracks a similar large-cap benchmark

Years of negative alpha combined with high fees show that the active manager isn't adding value. A lower-cost index fund with comparable exposure is a reasonable recommendation, while chasing last year's winner or adding risk doesn't fix the problem.

• ACorrect. Persistent negative alpha means the manager hasn't added value after adjusting for risk, and the above-average fees keep reducing net returns. Index funds normally cost less than actively managed funds, so a low-cost index fund with similar exposure is a reasonable alternative.
• BIncorrect. This is performance chasing. Past returns don't necessarily predict future returns, and very few active funds beat their benchmarks over long periods, including funds with strong short-term records. The replacement may also carry similarly high costs.
• CIncorrect. Adding a higher-beta fund raises the portfolio's market risk and leaves both problems in place: the fund's high costs and its underperformance.
• DIncorrect. Every share class holds the same portfolio under the same manager, so the underperformance continues. A different class may change the load or 12b-1 fee, but it doesn't address the lack of manager value added.

Answer: D) Risk-adjusted return

• AIncorrect. It adjusts for risk.
• BIncorrect. It adjusts for risk.
• CIncorrect. It adjusts for risk.
• DCorrect. Excess return ÷ standard deviation.

Answer: C) 10 years

• AIncorrect. The stretch is now limited.
• BIncorrect. The rule is 10 years.
• CCorrect. Under the SECURE Act, with some exceptions.
• DIncorrect. That's the rollover window.

Answer: A) Cost averaging

• ACorrect. It buys more shares when prices are low.
• BIncorrect. That uses borrowed money.
• CIncorrect. That shifts industries.
• DIncorrect. That sells borrowed shares.

Answer: B) A diversified stock allocation

• AIncorrect. Cash often trails inflation.
• BCorrect. Stocks have historically outpaced inflation.
• CIncorrect. Inflation erodes fixed payments.
• DIncorrect. That isn't diversified.

Answer: A) Lengthen duration

• ACorrect. Longer bonds gain more when rates fall.
• BIncorrect. That reduces gains.
• CIncorrect. Their prices change little.
• DIncorrect. That forgoes gains.