Friday, October 12, 2012

Series 65 or Series 66 Practice Question

There are many ways to ask a test question. To make sure you've studied the Uniform Prudent Investor Act, the test can ask you which of the following is or is not actually part of that document. Or, they can see how you APPLY the information you were supposed to have gotten from the UPIA. Maybe they throw something like this at you:

A large estate has hired you, an Investment Adviser Representative, to manage the account. Upon review of the assets, you find that 10% of the account is devoted to long-term investment-grade corporate bonds and 90% to a common stock issue that has appreciated 48% the past few months. What should you do according to the principles of the Uniform Prudent Investor Act?
A. nothing, as an estate account is generally closed within 6 months
B. sell the stock, as it is considered imprudent to hold such a large % of a fiduciary account in common stock
C. you may either sell or hold the stock, depending on which seems the more prudent action
D. you should probably sell the stock, as capital gains in this case can be minimized or avoided

Ouch. I know exactly what the question is getting at here, and even though I wrote it, I'm not 100% sure what the right answer is. Seriously. I like "D" here, even though C seems like a darned good answer, too. Generally, a prudent investor should diversify, except when he determines it's more prudent not to. But, the best reason not to diversify would be that he doesn't want to generate a bunch of capital gains. Fine, but this is an estate account--the cost basis is whatever the stock traded for on the date of death, and it's a long-term capital gain, assuming the estate sells it for more than it was trading on the date of death. In fact, an estate can just sell the stock 6 months after the date of death and use the value that day as the cost basis--no capital gains. So, in general, I like Answer Choice C, but since the question says it's an estate account, and since that clearly makes a difference, I go with Answer Choice D. Series 65 Help


  1. Wouldn't the most prudent thing to do to be to assure that as a fiduciary you minimize rise despite capital gain implications since it is an estate, so B would be correct?

  2. B tries to make blanket statements that don't hold up, while D makes a statement no one can really argue with. Bottom line--if you and I see this on the test, neither one will know if we got it right. And NASAA would never comment on a question like this, because it might be close to something they have in the test bank. Remember that both B and D are saying to sell the stock, so the fiduciary duty is met either way.