Wednesday, December 30, 2009

Tax Forms

Even though NASAA claims that their Series 65 and 66 exams are not based on memorization, their exams sure do churn out their share of mindless memorization questions. Like this one:

A limited partnership uses which of the following forms when reporting taxable income?
A. 1040
B. 1120
C. 1065
D. 1031

EXPLANATION: the 1040 is used by individuals and sole proprietors. A 1031 tax-free exchange can be done on real estate investments, and the 1120 is used by corporations. Form 1065 is used by partnerships.


Tuesday, December 29, 2009


Have you ever seen a college basketball game in which the opposing fans try to haze the free-throw shooter by waving colorful distractions and shouting at him?
Ever noticed how it has zero effect on a good free-throw shooter?
The Series 65 and 66 exam also like to haze the people shooting free-throws at the testing center. They know that the answer is sitting right there in front of you like an open hoop, so they have to distract you from choosing it. One trick is to overwhelm you with verbiage. Another is to present common formulae backwards. Still another is to use weird jargon that you weren't expecting. Like this possible exam question:

Joey Investor is long 1,000 shares of ORCL common stock. It is now June, and Joey feels that the market for ORCL is headed sideways over the next several weeks. Therefore, he should
A. sell 10 ORCL Jul calls
B. buy 10 ORCL Jul puts
C. sell 10 ORCL Jul puts
D. buy 10 ORCL Jul calls

EXPLANATION: Always sell options if the market is supposed to go "sideways" or "remain unchanged." That way, you get the premium now, and then the option expires. Don't sell puts if you own stock--if the stock goes to zero, you lose 100% on the stock, then you have the OBLIGATION TO BUY the stock for the strike price . . . even though it's worthless. Sell covered calls in this situation. Joey owns 1,000 shares, so he can cover 10 call options.

What if you don't know what "sideways" and/or "long" mean?
You could be in trouble. That's why I just posted this question.

An options question

Sammy Bonami buys a MSFT May 55 call @3. When MSFT rises to $62 a share, Sammy sells 100 shares short, then covers the short position by exercising the call option. What is the result of Sammy's trading activity?
A. gain of $7 per share
B. gain of $4 per share
C. loss of $10 per share
D. loss of $3 per share

EXPLANATION: this is exactly how a trader would exercise a call. In order to take advantage of the temporary market price of $62, Sammy needs to sell the stock short now. At this point he can "cover his short position" by exercising his right to buy the stock for $55 a share. He doesn't keep the full $7 a share difference, since he paid $3 a share for the right to buy the stock at $55. He keeps $4 per share.
Some test-takers would report that they have "never seen anything like this before," but, in fact, they have learned the fundamentals that would allow them to figure it out with strategy and patience. Our Pass the 65 book covers options in more detail than it probably should, and--no matter what we cover in the book--the exam wants to see if you can apply the fundamentals in a very unexpected, challenging way. You have to figure this sort of question out. Ask yourself, "what does a call buyer get to do?" He gets to buy at the strike price--okay, so have him pay the strike price and the premium. You see that he "sells" the stock for $62 a share, so that has to offset the $58 per share that he paid. Are you 100% confident with your answer? Heck no--luckily, you only need a 68.5% to pass before 1/1/10, and a 72% to pass thereafter.


Be preapred to figure things out at the testing center--no matter what you've studied, the test questions will force you to apply the concepts in unexpected, seemingly impossible ways. You don't get to spit back the little flash cards you've memorized on the Series 65 or 66. You have to use logic and test-taking skills to apply the fundamentals in a very challenging, often confusing environment.

Lucky you.

Thursday, December 17, 2009

Types of Trusts

Here is a question very similar to what many of you will see on the Series 65 or Series 66:

What type of trust requires the trustee to distribute to beneficiaries immediately?

A. Simple

B. Complex

C. Irrevocable

D. Revocable

EXPLANATION: a simple trust distributes "DNI" (distributable net income) to the beneficiaries, while a complex trust can retain some of the income to build up the "corpus" or principal. The choices "irrevocable" and "revocable" have more to do with estate taxes and tax liabilities during the lifetime of the grantor.


Monday, December 7, 2009

Series 65 - Likely Test Question

A customer who recently passed his Series 65 exam reports that he saw a question similar to the following:

There is a federally covered advisor with an office in state A, who has clients in state A. He also has 3 non-institutional clients in state B and 3 non-institutional clients in state C. He has 3 more clients in state X and wants to have custody of the clients' accounts in state X. In which states does he have to register?

A. A only
B. A, B, C and X
C. A and X only
D. None, because he is federally registered

My explanation:
The answer is D because this is a federal covered adviser. They notice file in State A, where they have an office. They do NOT need to notice file in State B, State C, or State X because they aren't soliciting new business there (holding out as advisers) and have no more than 5 non-institutional clients. Even if they had more than 5 non-institutional clients in those states, they would not register there; they would only notice file there. Custody has nothing to do with this question. As a federal covered adviser, they'll meet the SEC's net capital requirements under IA Act of 1940. The only authority the states have over SEC-registered advisers is anti-fraud and notice filing authority.

Another happy Series 65 customer

When customers pass their Series 65 or 66 exams, few think to email me and let me know the good news. Still, I have hundreds of thank-you emails from ecstatic test-takers who skipped their way out of the exam center. This is one I received today, and I think you'll find some good stuff that you can apply yourself. Looking at his GoNoGo results, I asked if he had taken the Series 65 yet. He replied:

Yes, sorry did not get back to you. I have to look up the cert sheet, but I scored around 85.

Interesting observation on the test. They are getting very good at writing the questions with language and phrasing that is enough different, and fairly obscure, as to really make you have to re-read the question many times. I am sure nerves have something to do with it, but it seems they are going to great lengths to make sure no one who studied material like yours or Kaplan easily recognizes questions verbatim.

Also of note, there were less retirement vehicle questions than I expected, and more trust formation questions, which is a subject I never really remembered any questions on as I studied. Those were pure guesses for me. All in all, I seemed to “check for review” about 35-40% of the test because of the wording of so many of the questions. In the end I did not change a lot of my answers unless it was obvious I was overlooking the right answer. It just seems the test writers are getting better at making the questions and answer choices a little harder to decipher. Definitely not as easy to immediately remove 2 of the 4 choices as it used to be.

Alls well that ends well. I will gladly recommend your materials to others.



PS. People should not underestimate the power of an experimental question. I know we cannot “tell” which is and is not, but some of the questions will be so confusing, and I recall one that I am sure had 4 wrong answers, and one that had four right answers. Well, when you are in a game time frame of mind and extremely nervous about passing, these definitely can knock you off your game and change your focus. Remind your clients, as I am sure you do, not let any one question mess with your head — because it may be a mind bending experimental one. If you still haven’t answered in 2 minutes, click and move.

Wednesday, December 2, 2009

Am I ready to pass the exam?

The best part of my chosen career is the satisfaction I get helping others to pass their securities license exams. Checking my InBox last night, I found this uplifting email from a Series 65 customer:

Whoo, Hoo, I passed the 65 today with an 85%. Your training materials and test questions are awesome. They provided all I needed to learn (along with the official website readings).

Your practice test questions are right on.

This student had already taken the GoNoGo exams that you'll find at Her scores were 86% and 90%, for an average score of 88%. As usual, the score on the actual Series 65 was a bit lower, but only by 3 points. At this point, the majority of GoNoGo exam scores are + or - 6 points from the actual score on the Series 65. This is not a guarantee, but it does imply that anyone scoring in the high 70's has a high chance of passing the exam at the testing center. I encourage you to take one or both "GoNoGo exams" just before scheduling your test. If you don't like the results, send me an email at to set up some private, online tutoring.

Remember--you want to get the 65 off your plate before the end of 2009, when the passing score jumps from 68.5% to 72%.