Saturday, January 30, 2010

Blogging for dollars

Everyone taking the Series 66 is also already a Series 7-licensed stockbroker or will soon become one, assuming there are no felony convictions in the recent past or any misdemeanors involving fraud or other "money crimes" to report on Form U-4. Therefore, FINRA rules shape your daily business life. They are also part of the Series 65 exam, so those candidates have to know about them, even if they never get a Series 6 or 7 and become subject to FINRA's awesome powers to ruin careers or protect investors, depending on your perspective.

As I found out here at Google's "blogspot," setting up a blog is amazingly easy these days. You just give it a name, choose a template and start posting whatever it is you want to say. I'm not sure why so many blogs degenerate into rants and personal assaults on people the blogger has never and will never meet, but bashing the president of the United States is within the blogger's 1st Amendment rights. Recommending that readers purchase securities or stop by the branch office for an IRA checkup is a whole nuther thing entirely. FINRA has a notice to members (10-06) that everyone should read. Turns out, if you're an agent for, say, Morgan Stanley, Morgan Stanley has to worry about all kinds of things connected to your blog, facebook, etc. First, your static blog posts that mention anything about your firm's business or securities in general is likely considered "advertising" by FINRA, and advertising is subject to pre-approval and record retention by the firm. If you're recommending securities, FINRA's suitability rules apply. Is the variable annuity you're pushing suitable to all followers of your blog? If not, that could be a problem, especially if they buy what you're recommending and end up losing money. Facebook allows you to put up static posts, but also allows you to chat in real-time. While "extemporaneous" commentary on a website or during any public appearance does not--and cannot--be pre-approved, it does have to be monitored by compliance, a group not generally known for their sense of humor.
So, before you launch a blog or post a stock recommendation on your Facebook wall, please read the FINRA notice 10-06, and please proceed carefully, letting your compliance officers know exactly what you're up to online.

Thursday, January 28, 2010

Can anyone pass the new Series 65?

In case you're wondering if anyone can pass the "new Series 65" with the new concepts added and the higher passing score, please take a look at an email I just got from a rather elated customer:

Thank you thank you thank you!! Passed the 65 with a 79 the first time. Oops. Must have studied too hard. Great author, great study materials equal great results! Yeehaa!

That score of 79 tells me a few things. First, the customer was not ready to stand up and teach a class on any aspect of the Series 65. Second, the test was REALLY HARD to study for and pass. And, three, he made it happen, anyway. In other words, when somebody gets a 92% on the Series 65, I can't take much credit for that--that person is a braniac. When someone gets a 79%, I know that they performed at a higher level than they thought possible and put in a huge amount of work. So, if you don't plan on getting a 92% on your natural abilities, I suggest you do as this customer did and work your tail off.

Monday, January 25, 2010

What about the new Roth IRA rules?

Many Series 65 and 66 candidates have been sending emails asking if the exam will be testing the new Roth IRA rules for 2010. The most accurate answer is this: nobody knows. Why not? Because nobody ever knows what the Series 65/66 is going to ask. There are companies out there who will give you a definitive answer here, and there are companies like Pass the Test who prefer to tell you the truth--nobody knows. If the test does ask a question requiring you to know the peculiar situation concerning Roth IRAs in 2010, this is what you would need to know:

  • Income limits still apply and prevent "high-income" people from making a contribution
  • The only change is that "high-income" people can do a Roth conversion by paying tax on all the money in their Traditional IRA account and making it a Roth account

That's all that's happening this year--if you want to convert a Traditional IRA to a Roth IRA, you can do that this year regardless of your income level. If you want to add new money to your Roth IRA, you will be prevented from doing so if you reach a certain income level that is one set of numbers for single filers and another for married couples filing jointly. What are those numbers? Your firm has them somewhere, and we do not think those numbers are testable. But, again, nobody really knows for sure what is "testable" and what isn't. That's just the sort of folks we deal with when taking the Series 65/66 exam. They do whatever it takes to flunk about 1/3 of all test takers on any given day. Don't let the wisenheimers put you into that bottom 1/3.

Thursday, January 21, 2010

Books and Records

One of the reasons I'll probably never open an advisory business is that I hate record-keeping. If you read the NASAA's "Recordkeeping Requirements For Investment Advisers Model Rule 203(a)-2" you will see that advisers have to keep better records than surgeons and nuclear waste disposal companies combined. I'm lucky if I remember to print out my monthly account statements for the IRA, SIMPLE, etc.

Since recordkeeping is an important topic, we should expect one or two questions similar to the following:

An investment adviser’s duty to maintain books and records is accurately described by which of the following?
A. only advisers with custody or discretion are required to keep books and records subject to inspection by the Administrator
B. electronic records are allowed only if hard copies are also maintained on site
C. an adviser must retain records for five years from the end of the fiscal year during which the last entry was made on record
D. an adviser with offices in more than one state must meet the books and records requirements of each state

EXPLANATION: all advisers have to keep records, so A is eliminated. Electronic records are okay as long as the adviser can "reasonably ensure that any reproduction of a non-electronic original record on electronic storage media is complete, true, and legible when retrieved" and that the records are "reasonably safeguarded from loss, alteration, or destruction" and the adviser "limits access to the records to properly authorized personnel and the [Administrator] (including its examiners and other representatives)." So, B is eliminated. And, D is eliminated because the adviser only has to meet the books and records requirements set by the Administrator of their "principal place of business."


Wednesday, January 20, 2010

Fair Market Value

The Series 65/66 exams are constantly reaching for more details than their exam outline would imply. Luckily, we have customers taking the exams who report some of the test writers' little tricks. How would you answer the following practice question?

If you inherit appreciated property, your tax basis is
A. fair market value on the date of death
B. fair market value 6 months after the date of death
C. neither choice listed
D. either choice listed

EXPLANATION: if you inherit, for example, 1,000 shares of MSFT that Grandma purchased for $10 each, you can take the fair market value as of the date of her death or six months later--which is when most estates close out. If the stock is worth $50 on her date of death, you can take that stepped-up value as your cost basis. Or, if the stock is worth $55 six months later, you can take that as your stepped-up cost basis. Also remember that any gains are considered long-term, regardless of your holding period.


Thursday, January 14, 2010


Many exam candidates struggle to understand the terms involved with trading securities. This is only possible if the candidate has never entered his or her own orders online. I, on the other hand, knew exactly how to explain bid-ask, stop, limit, etc. for the first Series 7 class that I ever taught for the big company in this industry. That's because I had entered all types of market, limit, and stop orders for both stocks and bonds through my TD Ameritrade accounts. But, if you haven't done that, you'll probably need some extra help. So, here goes.
There are broker-dealers out there who act as "market makers" and step in between buyers and sellers of stock. You and I don't want to find buyers and sellers, so we go through a dealer/market maker. Let's say Goldman makes a market in MSFT. They publish:

BID: $25 ASK: $25.10

Just like at Sotheby's sellers always sell to a bidder--so we can get that $25 bid right now if we want to sell our MSFT. Buyers always have to pay the ASKing price--so we can buy MSFT for $25.10. That little 10cent per share is Goldman's "spread," and they make money by running as many transactions as possible in which they pay somebody a lower price and immediately sell to someone else at a slightly higher price.

It's a two-sided "coin," in which the test can haze you. Do market-makers buy at the BID, or do customers sell at the BID price? Yes--that's what happens. Customers can sell to the market maker, who will buy at the BID price.

Do market-makers sell at the ASK price, or do customers buy at the ASK price?
Exactly right.

A limit order is used if you don't like the BID-ASK prices. You don't want to pay $25.10? Put in a buy-limit order at $24. If the ask price drops to $24 or lower, you buy the stock. If it doesn't drop, you don't. You want to sell but get more than that $25 bid? Place a sell-limit order at $26. If the bid rises to $26 or higher, you'll sell. If it doesn't rise, you won't.

Tuesday, January 12, 2010

Completion of a securities transaction

I was reading a financial planning textbook the past couple of weeks in order to enter the twisted minds of those who write Series 65/66 questions, and I ran into a concept that makes a very likely exam question:

When does the SEC consider that a securities transaction has been "completed"?

A. when the prospectus has been received
B. when a registered representative completes the order ticket and submits it to the wire room
C. when the customer gives oral authorization for the terms of the order
D. upon settlement

EXPLANATION: a securities transaction has been "completed" when it settles/clears, at which point payment has been made, and the securities have been delivered. An investment adviser, for example, must disclose that it intends to act in a 'principal' capacity on a customer transaction and get the customer's consent no later than completion of the transaction, which is settlement. Settlement is usually T + 3 business days.


Friday, January 8, 2010

Default risk on US Treasury Securities

If you get a test question asking about whether the US Treasury issues bills, notes, bonds, or STRIPS that present default risk to investors, how would you answer it? Apparently, it depends on how much Glenn Beck, Sean Hannity, and Rush Limbaugh you've been listening to. During the Friday Free Broadcast today, I tried to present a likely test question asking which investment risks an investor bears when buying a Treasury note. The answer--the one the exam wants you to pick--does not include "default risk." One of the attendees began to write that "just because they've never defaulted doesn't mean they can't default." Good point, but the answer is still: no default risk on a US Treasury Note.

Why? Because there IS no default risk on a US Treasury Note. About 220 years ago, the United States of America was formed, and one of the foundations of this new nation was that the federal government would assume all of the 13 states' debts that had been racked up during the 8-year revolutionary war that the legislatures never actually bothered to pay for. Alexander Hamilton insisted that the new central government had to show European trading partners that the credit of the new US Government was solid. After 220 years or so, without ever defaulting on its obligations, the US Treasury has earned the right to claim that their securities have no default risk. This isn't Russia, which in 1994 defaulted on its government bonds. This is a country that has paid its obligations for over two centuries. If you tell your clients that US Treasury securities aren't safe, that they are somehow subject to default risk, you could end up in arbitration or civil court when your clients avoid T-notes in order to buy your mutual funds, stocks, bonds, etc. In fact, if your client took your Glenn Beck-style anti-federal-government advice and avoided perfectly safe, secure Treasuries only to lose even 10% on what you recommended, his attorney would have a field day with you. He could say, "So, you're convinced that the US Treasury is not fiscally sound? Do you have any cash in your wallet? Could I see it for a second? Do you mind if I light this $300 on fire? Oh, you do? So, apparently, the US Treasury is strong enough to back up your money, just not your clients' money, is that right, sir?"
Maybe you saw that one coming and wisely left your currency at home. All the client's attorney has to do now is pull up a bunch of historical outcomes for mutual funds, stocks, and bonds. He would have ample examples of massive investment losses on bonds, stocks, and variable annuities. But for over 2 centuries, Uncle Sam has returned every dollar it ever borrowed from an investor. And you told the client that Uncle Sam was too risky; go ahead and buy this variable annuity instead.

This isn't just hypothetical. A customer who bought the Pass the 65 book has never been able to get registered because he went around showing senior citizens PowerPoint slides with titles such as, "Why your money isn't safe in the bank." I guess he also doesn't trust the US Government, even though its FDIC program has never failed bank customers. The regulators in Massachusetts decided it was a fradulent, misleading sales tactic--which it was. Just like the guy still up on NASAA's website who got caught on Dateline trying to scare people out of their bank accounts because "the FDIC's credit rating is F-minus."

Anyway, if you want to enjoy conspiratorial radio and TV ranters as a diversion, please do so. But be careful how much of that hysteria you bring to a test question and--more important--be very careful how much you bring to the table with your prospects and clients.

Tuesday, January 5, 2010

Figure it out, people!

Far too many license exam candidates labor under a misconception about the exams; they think they are supposed to know the answer as soon as they read the question. Unfortunately, for most questions, your job is to FIGURE IT OUT. For example, take a look at the following:

Parents often use zero coupon bonds such as Treasury STRIPS to fund future educational needs. Which of the following is an inaccurate statement of such investments?
A. they lock in a rate of return for the life of the bonds
B. taxation is deferred until maturity
C. their market price volatility is higher compared to interest-paying debt securities
D. they require lower capital commitments

Maybe you already know the answer, but your approach should be to take each choice and try to eliminate it--the choice you can't eliminate must be your answer. Also, it helps to remember that you're eliminating the three TRUE statements in this one. Right? Ok, so do zero coupon bonds lock in a rate of return for the life of the bond? Don't try to picture an imaginary flash card here--ask yourself how zero coupons work. Why are they called "zero coupon" bonds in the first place? Because they make exactly zero coupon payments--therefore, the investor does not reinvest coupon payments at varying rates along the way (reinvestment risk), so I guess the return is "locked in for the life of the bonds." See how much thought it can take to eliminate just one answer choice? Good--two more need to be eliminated, and then we're done. Taxation is deferred until maturity--is that true? Many people have memorized this, but even if so, don't choose this answer yet. Not until you eliminate the other two. Put this one on hold--it looks good, but maybe one of the other choices looks even gooder. What about the "market price volatility," does that make sense? Well, if you remember all that we've said about "duration" and how zero coupons have high "durations," you know it's true. If you don't remember it, figure it out--why would their price be volatile? Probably because there's no cash flow being paid to make the investor feel better about holding the thing. That's true, so we eliminate it, and we sit 50-50 at this point. Either B or D is going to be our answer--getting tired and frustrated? Suck it up, people--you have over 100 questions to answer whether taking the Series 65 or 66. Okay, Choice D says that zero coupon bonds somehow "require lower capital commitments." And here is where we separate those who will pass the first time and those who might pass on their second or third attempt. The candidates who get frustrated now and start preparing their snarky email to Kaplan, STC, or Pass the Test, want to start squirming like a little kid all dressed up for a 3-hour church service on a hot Sunday in August--no fair! I don't remember ever seeing that before! Is this test testing my knowledge or my ability to take a test?
Yes, and yes--the clock is ticking; what is your answer?
Take a deep breath and t-h-i-n-k about it. Why would the zero coupon require a lower capital commitment? Well, how are they purchased? At a deep discount to the par value--aha! If you can buy $100,000 par value of STRIPS for just $50,000 or $60,000, I'd say that represents a "lower capital commitment," whether I've ever thought of it that way or not. Choice D is eliminated, along with Choice A and Choice C. What's the right answer?
I just told you. It's not A, C, or D.

If I seem to be getting a little edgier, it's because 2010 represents a whole new reality, what with the 72% required passing score for the Series 65 and the even scarier 75% passing score for the Series 66. I can't afford to be nice at every turn this year. My job is to scare exam candidates sufficiently to take this stuff seriously and start thinking through exam questions as opposed to expecting to have them memorized as you used to do in high school and blow-off college courses.

Frankly, the harsh, cold January weather here in Chicago is making my job a little easier.