Saturday, January 30, 2010
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
Monday, January 25, 2010
- 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
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
Wednesday, January 20, 2010
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?
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
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
Tuesday, January 5, 2010
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.