Let's enjoy a difficult practice question on a Saturday, shall we?
One of your customers, Joe Myers, calls to inquire about something he heard but did not quite understand on CNBC. "Why is the price differential between low-risk and high-risk debt securities smaller than usual?" he asks. You would respond
A. turn off the TV and get a life, Joe
B. it means investors are confident in the overall economy
C. it means investors are not insisting on safety to the same degree
D. both B and C
ANSWER: D
EXPLANATION: right now, investors will accept tiny yields on Tbills, Tnotes, and Tbonds and won't touch junk bonds (corporate and muni) unless the bonds offer ridiculously high rates. The "yield spread" has widened in other words because investors are freaking out. For a few days, investors dumped everything and ran to Treasuries, accepting NEGATIVE yields on Tbills. Seriously--people were giving Uncle Sam $1,005 in order to receive $1,000 in 3 months, essentially, which is known in financial textbooks as "really stupid."
Now, if the difference in yields between ultrasafe Treasuries and junk bonds narrows, that expresses confidence. Investors aren't so worried about companies defaulting on them and will pay more for the bonds/accept lower yields.
Saturday, April 4, 2009
Saturday, March 28, 2009
Registration Forms
Investment advisers register electronically through IARD, which is the Investment Adviser Registration Depository. Although FINRA (formerly NASD) does not have authority over advisers, they are really good at administering a big, ever-changing database like this one. FINRA also maintains a registration system for broker-dealers and their associated persons, called the CRD, which is short for Central Registration Depository. An agent of a broker-dealer remains in the system for two years after leaving the business, so arbitration decisions and disciplinary actions will be viewable during his career, and for two years after it ends. This is why the "broker check" feature at www.finra.org is the first stop for many investors. If they see that the name on the business card is associated with all sorts of industry violations and arbitration awards to upset customers, it could be tough for that name to get his foot inside the door.
Investment advisers file a "form" called Form ADV. ADV Part 1 is filed with the regulators, and it provides the essential information about the adviser: how it does business, who its clients are, whether it has custody and/or discretion over client assets, information on the officers and directors, etc. ADV Part 2 is the adviser's disclosure brochure, which is delivered to prospects before they sign the advisory agreement. ADV Part 2 gives the prospect enough material information to decide whether to use the adviser. This is where the potential conflicts of interest are disclosed, and if there is any disciplinary activity in the past 10 years, the adviser has to add disclosure pages about that. In other words, ADV Part 2 can end up scaring some prospects away. But, that's okay. Acting as somebody's investment adviser is a very big responsibility--investors must be able to trust their adviser, or keep looking.
The adviser (the firm) registers with Form ADV. They register their investment adviser representatives through Form U-4. Form U-4 is also used by broker-dealers to register principals and agents. The firm itself registers with Form BD. When an "associated person" of a broker-dealer leaves the firm, a Form U-5 is filed. That means that a U-5 is also used when an investment adviser representative leaves the adviser. Sometimes the termination is on good terms--sometimes the individual is being fired for cause. If the agent's license is suspended over a rule violation, that must be indicated on the U-5, which means that the public can find out about it through FINRA's broker-check at www.finra.org
If you would like more information on these testable registration forms, use the NASAA website at the following link: http://www.nasaa.org//Industry___Regulatory_Resources/Uniform_Forms/
Investment advisers file a "form" called Form ADV. ADV Part 1 is filed with the regulators, and it provides the essential information about the adviser: how it does business, who its clients are, whether it has custody and/or discretion over client assets, information on the officers and directors, etc. ADV Part 2 is the adviser's disclosure brochure, which is delivered to prospects before they sign the advisory agreement. ADV Part 2 gives the prospect enough material information to decide whether to use the adviser. This is where the potential conflicts of interest are disclosed, and if there is any disciplinary activity in the past 10 years, the adviser has to add disclosure pages about that. In other words, ADV Part 2 can end up scaring some prospects away. But, that's okay. Acting as somebody's investment adviser is a very big responsibility--investors must be able to trust their adviser, or keep looking.
The adviser (the firm) registers with Form ADV. They register their investment adviser representatives through Form U-4. Form U-4 is also used by broker-dealers to register principals and agents. The firm itself registers with Form BD. When an "associated person" of a broker-dealer leaves the firm, a Form U-5 is filed. That means that a U-5 is also used when an investment adviser representative leaves the adviser. Sometimes the termination is on good terms--sometimes the individual is being fired for cause. If the agent's license is suspended over a rule violation, that must be indicated on the U-5, which means that the public can find out about it through FINRA's broker-check at www.finra.org
If you would like more information on these testable registration forms, use the NASAA website at the following link: http://www.nasaa.org//Industry___Regulatory_Resources/Uniform_Forms/
Friday, March 27, 2009
Monetary Policy in the Real World
I know I harp on this a bit, but too many candidates fail to see the real-world importance of what they're studying for the exam. I was teaching a Series 65 online class the other day, talking about monetary and fiscal policy, hoping I could tie it to something going on in the news. Boy, did I get lucky! Just after I told them that the FOMC can purchase Treasuries to help a faltering economy, I found the following news item at http://news.yahoo.com/s/ap/20090318/ap_on_bi_ge/fed_interest_rates:
Fed to buy up to $300B long-term Treasury bonds WASHINGTON – The Federal Reserve announced Wednesday it will spend up to $300 billion over the next six months to buy long-term government bonds, a new step aimed at lifting the country out of recession by lowering rates on mortgages and other consumer debt. At the same time, the Fed left a key short-term bank lending rate at a record low of between zero and 0.25 percent. Economists predict the Fed will hold the rate in that zone for the rest of this year and for most — if not all — of next year. Fed purchases should boost Treasury prices and drive down their rates. That would ripple through and lower rates on other kinds of debt. The last time the Fed set out to influence long-term interest rates was during the 1960s. The article didn't mention "fed funds rate," but it hinted at it with "a key short-term bank lending rate." As always, you have to be patient and flexible when studying the test material or the real world version thereof. Try to see the Series 65 connection in the Jim Cramer show, the morning newspaper article, maybe even the late-night comedian's monologue. The FOMC is purchasing Treasuries, which will lower their yields and probably help push down mortgage rates. It's not just a bullet point--it's going on right now. Amazing.
Fed to buy up to $300B long-term Treasury bonds WASHINGTON – The Federal Reserve announced Wednesday it will spend up to $300 billion over the next six months to buy long-term government bonds, a new step aimed at lifting the country out of recession by lowering rates on mortgages and other consumer debt. At the same time, the Fed left a key short-term bank lending rate at a record low of between zero and 0.25 percent. Economists predict the Fed will hold the rate in that zone for the rest of this year and for most — if not all — of next year. Fed purchases should boost Treasury prices and drive down their rates. That would ripple through and lower rates on other kinds of debt. The last time the Fed set out to influence long-term interest rates was during the 1960s. The article didn't mention "fed funds rate," but it hinted at it with "a key short-term bank lending rate." As always, you have to be patient and flexible when studying the test material or the real world version thereof. Try to see the Series 65 connection in the Jim Cramer show, the morning newspaper article, maybe even the late-night comedian's monologue. The FOMC is purchasing Treasuries, which will lower their yields and probably help push down mortgage rates. It's not just a bullet point--it's going on right now. Amazing.
Tuesday, March 24, 2009
What are all these different licenses and exams?
Today's "clickable" title will take you to FINRA'S run-down on the various license exams, but let's also do a quick and generalized breakdown here:
Series 6: this license exam is typically taken by insurance agents who also "want" to (have to) sell variable annuities, variable life insurance, and mutual funds in addition to their bread-and-butter business of whole/term life insurance, fixed annuities, etc . This is a securities agent/rep exam, so, by definition, the individual must be hired and sponsored by a broker-dealer. This "broker-dealer" would typically be a related subsidiary to a firm such as Met-Life, Northwestern Mutual, Country Insurance & Financial Services, State Farm, Allstate, etc (not to leave anybody out). The company strategy here goes something like this: let's hire a large crop of potential salespeople and get them selling insurance, annuities, and mutual funds as fast as possible. The Series 6 is "only" 100 questions and does not hit as hard as the other exams, although--have no doubt about this--the Series 6 is a tough exam. I'm just saying that some of the other tests I'm going to look at are longer and generally trickier. Most states require an individual to pass the Series 6 and the Series 63 before obtaining a state license to sell securities. So, let's look at the 63 next.
Series 63: this is the state law exam. It focuses on legalistic definitions, sophisticated exemptions for securities registration and registration of agents, broker-dealers, and advisory personnel. Not surprisingly, if given a choice, 74.8% of candidates recently surveyed chose to undergo oral surgery without anaesthetic than take a difficult, frustrating exam about "unregistered, non-exempt securities being offered to non-institutional investors." The exam's main focus is business practices--21 of the 60 questions focus on what is ethical, prohibited, etc. No one asked my opinion, but I've taken the exam twice, kicked its sorry ass twice, and still fail to see the point of making anyone take it. I could take 10 important points from the whole body of material, insert it into the Series 6, and call it a day. But then, the regulators would only collect one set of testing fees, and where's the fun in that. The next license we'll discuss is the Series 7--remember that the Series 63 is also required with that one.
Series 7: this is the exam to take if you want to be the traditional "stockbroker" like Charlie Sheen in "Wall Street," straddling phones, swearing up a storm, and entering buy and sell orders for commissions. With the Series 7, you can sell what a Series 6 person can sell, plus just about everything else imaginable: corporate bonds, municipal bonds, US Government bonds, options, stocks, direct participation programs, etc. The test is 250 questions long and lasts up to 6 hours for those who need the time and can also take the punishment. As with the Series 6, the individual has to be hired and sponsored by a broker-dealer just to take the test.
Is the Series 7 harder than the 6? Tough to say--the national pass rate is much higher on the Series 7, actually. But, the Series 7 is 250 questions in 6 hours, versus the Series 6's 100 questions in 2 hours and 15 minutes. That has to add to the difficulty factor. But, all I can say for sure is that the Series 7 is longer than the Series 6. Also, I find the Series 6 material to be rather boring compared to the Series 7 , which goes into many more topics that I care about and goes into them in depth. Then again, as I may have mentioned in earlier posts, when I struggled for 10 minutes to first understand a "debit call spread," I felt as if I were getting a really good brain massage, and when the breakthrough came, I actually jumped up and nearly scared my next-door neighbor, the cat lady, to death. "Ah-hah! Of course the debit call spread investor wants both options to go in-the-money! That way, he'll be forced to buy low and sell high every time! Awesome!"
Hmm? Oh, no thanks. I've already been recommended a good therapist.
Seriously, though, the Series 7 involves a lot of time to study, and that's what makes it "hard." It involves more vocabulary than the Series 6 and goes into more detail on many topics. On the other hand, the Series 6 goes deep into mutual funds, variable annuities, and taxation in a way that either rivals or exceeds the dreaded Series 7.
To sum up, then, whether you take the Series 6 to sell "packaged products" including annuities and mutual funds, or the Series 7 to sell that plus virtually every other type of security, you will also take the Series 63 in most cases. To make things more confusing, a Series 7 holder can take the Series 66 in lieu of the Series 63, but let's save the advisory side for another post. It's 6 o'clock on a Tuesday morning, and I'm afraid I'm going to over-excite us if I dig too deep into the material at this time.
Series 6: this license exam is typically taken by insurance agents who also "want" to (have to) sell variable annuities, variable life insurance, and mutual funds in addition to their bread-and-butter business of whole/term life insurance, fixed annuities, etc . This is a securities agent/rep exam, so, by definition, the individual must be hired and sponsored by a broker-dealer. This "broker-dealer" would typically be a related subsidiary to a firm such as Met-Life, Northwestern Mutual, Country Insurance & Financial Services, State Farm, Allstate, etc (not to leave anybody out). The company strategy here goes something like this: let's hire a large crop of potential salespeople and get them selling insurance, annuities, and mutual funds as fast as possible. The Series 6 is "only" 100 questions and does not hit as hard as the other exams, although--have no doubt about this--the Series 6 is a tough exam. I'm just saying that some of the other tests I'm going to look at are longer and generally trickier. Most states require an individual to pass the Series 6 and the Series 63 before obtaining a state license to sell securities. So, let's look at the 63 next.
Series 63: this is the state law exam. It focuses on legalistic definitions, sophisticated exemptions for securities registration and registration of agents, broker-dealers, and advisory personnel. Not surprisingly, if given a choice, 74.8% of candidates recently surveyed chose to undergo oral surgery without anaesthetic than take a difficult, frustrating exam about "unregistered, non-exempt securities being offered to non-institutional investors." The exam's main focus is business practices--21 of the 60 questions focus on what is ethical, prohibited, etc. No one asked my opinion, but I've taken the exam twice, kicked its sorry ass twice, and still fail to see the point of making anyone take it. I could take 10 important points from the whole body of material, insert it into the Series 6, and call it a day. But then, the regulators would only collect one set of testing fees, and where's the fun in that. The next license we'll discuss is the Series 7--remember that the Series 63 is also required with that one.
Series 7: this is the exam to take if you want to be the traditional "stockbroker" like Charlie Sheen in "Wall Street," straddling phones, swearing up a storm, and entering buy and sell orders for commissions. With the Series 7, you can sell what a Series 6 person can sell, plus just about everything else imaginable: corporate bonds, municipal bonds, US Government bonds, options, stocks, direct participation programs, etc. The test is 250 questions long and lasts up to 6 hours for those who need the time and can also take the punishment. As with the Series 6, the individual has to be hired and sponsored by a broker-dealer just to take the test.
Is the Series 7 harder than the 6? Tough to say--the national pass rate is much higher on the Series 7, actually. But, the Series 7 is 250 questions in 6 hours, versus the Series 6's 100 questions in 2 hours and 15 minutes. That has to add to the difficulty factor. But, all I can say for sure is that the Series 7 is longer than the Series 6. Also, I find the Series 6 material to be rather boring compared to the Series 7 , which goes into many more topics that I care about and goes into them in depth. Then again, as I may have mentioned in earlier posts, when I struggled for 10 minutes to first understand a "debit call spread," I felt as if I were getting a really good brain massage, and when the breakthrough came, I actually jumped up and nearly scared my next-door neighbor, the cat lady, to death. "Ah-hah! Of course the debit call spread investor wants both options to go in-the-money! That way, he'll be forced to buy low and sell high every time! Awesome!"
Hmm? Oh, no thanks. I've already been recommended a good therapist.
Seriously, though, the Series 7 involves a lot of time to study, and that's what makes it "hard." It involves more vocabulary than the Series 6 and goes into more detail on many topics. On the other hand, the Series 6 goes deep into mutual funds, variable annuities, and taxation in a way that either rivals or exceeds the dreaded Series 7.
To sum up, then, whether you take the Series 6 to sell "packaged products" including annuities and mutual funds, or the Series 7 to sell that plus virtually every other type of security, you will also take the Series 63 in most cases. To make things more confusing, a Series 7 holder can take the Series 66 in lieu of the Series 63, but let's save the advisory side for another post. It's 6 o'clock on a Tuesday morning, and I'm afraid I'm going to over-excite us if I dig too deep into the material at this time.
Wednesday, March 18, 2009
Agents vs. IARs
QUESTION: What is the difference between a broker-dealer agent and an investment adviser representative?
RESPONSE:
An agent of a broker-dealer gets paid to execute securities transactions, which includes selling mutual fund shares. If somebody buys or sells a security, the agent makes a small % of the transaction in the form of a commission. Broker-dealers and their agents only get paid IF somebody buys or sells securities today.
Advisers and their IARs don't get paid to sell securities. They get paid to do financial planning, or to manage portfolios. The adviser bills a % of the assets, which has nothing to do with a level of trading. If the adviser executes 3 or 30 trades in the client's account this quarter, it makes no difference to his compensation. He's billing, perhaps, .25% of the account balance each quarter, period.
I passed my Series 65 exam close to two years ago. If I were a normal person, I would be scrambling right now to get myself registered; otherwise I'll have to take the exam again if I ever want to start an RIA or work for one as an IAR. If I were to register, it would be as an RIA--I would set up an LLC called, perhaps, "Walker Wealth Management" and either charge hourly for my financial planning advice or--more likely--charge 1% of my clients' assets each year in exchange for managing their portfolios. I don't have any clients, though, so I would pay you to go get me some clients, sharing some of the 1% with you. Now, you are my IAR (investment adviser representative), and you get paid a % of assets as opposed to getting paid when the client buys a particular mutual fund. Once you land that client, in fact, you don't have to sell anything to him going forward. You'll be getting a % of his assets while you spend time trying to find more assets for me to manage.
Most reps these days get their Series 7 and 66. This allows them to earn commissions when selling securities (7) and also a % of assets when acting as an IAR (66). Or, some firms have their agents get the 6 and 63 in order to sell mutual funds, variable annuities, and VLI/VUL policies, and then get their 65 later on in order to work the "fee-based" or "IAR" side of the business. Northwestern Mutual (NMFN) actually has different "levels" for their reps. The rep starts out in the bread-and-butter area of life insurance plus the Series 6 and 63. He or she can then sell whole life, term life, variable life, fixed annuities, variable anuities, and mutual funds. Later on, the bravest of the reps go on to take the Series 7 and the Series 66. Once those are passed, the agents can earn commissions on individual stocks, bonds, etc. (Series 7) and--more importantly--they can earn a % of their advisory clients' assets (Series 66). It ends up being four securities licensing exams, but it also gets their people out there selling a lot sooner with the shorter 6 and 63 ordeal, and only puts the ones who are dedicated long-term in front of the big, scary Series 7 and 66.
So, the difference between a securities agent and an IAR is really the same difference that exists between a broker-dealer and an investment adviser. BDs are in the transaction business--they get paid if they can sell a security to a client. Investment advisers are in the advisory business--they get paid to manage the clients' assets on their behalf. That's where their fidicuiary relationship comes from, too, by the way. Unlike a broker-dealer, the adviser does not sell securities to the client. Essentially, the adviser is the client. Seriously.
RESPONSE:
An agent of a broker-dealer gets paid to execute securities transactions, which includes selling mutual fund shares. If somebody buys or sells a security, the agent makes a small % of the transaction in the form of a commission. Broker-dealers and their agents only get paid IF somebody buys or sells securities today.
Advisers and their IARs don't get paid to sell securities. They get paid to do financial planning, or to manage portfolios. The adviser bills a % of the assets, which has nothing to do with a level of trading. If the adviser executes 3 or 30 trades in the client's account this quarter, it makes no difference to his compensation. He's billing, perhaps, .25% of the account balance each quarter, period.
I passed my Series 65 exam close to two years ago. If I were a normal person, I would be scrambling right now to get myself registered; otherwise I'll have to take the exam again if I ever want to start an RIA or work for one as an IAR. If I were to register, it would be as an RIA--I would set up an LLC called, perhaps, "Walker Wealth Management" and either charge hourly for my financial planning advice or--more likely--charge 1% of my clients' assets each year in exchange for managing their portfolios. I don't have any clients, though, so I would pay you to go get me some clients, sharing some of the 1% with you. Now, you are my IAR (investment adviser representative), and you get paid a % of assets as opposed to getting paid when the client buys a particular mutual fund. Once you land that client, in fact, you don't have to sell anything to him going forward. You'll be getting a % of his assets while you spend time trying to find more assets for me to manage.
Most reps these days get their Series 7 and 66. This allows them to earn commissions when selling securities (7) and also a % of assets when acting as an IAR (66). Or, some firms have their agents get the 6 and 63 in order to sell mutual funds, variable annuities, and VLI/VUL policies, and then get their 65 later on in order to work the "fee-based" or "IAR" side of the business. Northwestern Mutual (NMFN) actually has different "levels" for their reps. The rep starts out in the bread-and-butter area of life insurance plus the Series 6 and 63. He or she can then sell whole life, term life, variable life, fixed annuities, variable anuities, and mutual funds. Later on, the bravest of the reps go on to take the Series 7 and the Series 66. Once those are passed, the agents can earn commissions on individual stocks, bonds, etc. (Series 7) and--more importantly--they can earn a % of their advisory clients' assets (Series 66). It ends up being four securities licensing exams, but it also gets their people out there selling a lot sooner with the shorter 6 and 63 ordeal, and only puts the ones who are dedicated long-term in front of the big, scary Series 7 and 66.
So, the difference between a securities agent and an IAR is really the same difference that exists between a broker-dealer and an investment adviser. BDs are in the transaction business--they get paid if they can sell a security to a client. Investment advisers are in the advisory business--they get paid to manage the clients' assets on their behalf. That's where their fidicuiary relationship comes from, too, by the way. Unlike a broker-dealer, the adviser does not sell securities to the client. Essentially, the adviser is the client. Seriously.
Saturday, March 14, 2009
Equity Indexed Annuities
Equity Indexed Annuities are on many insurance agents' minds these days. As you probably heard, the SEC recently tweaked the definition of a "security" in the Securities Act of 1933 by re-defining the exclusion for fixed annuities. Starting in 2011, equity indexed annuities that are "more likely than not" to pay out more than the stated guaranteed return will be considered "securities" subject to registration.
Ouch. How will this affect the exams? As usual--who knows? NASAA doesn't put out memo's that help people know what will be tested. That would be, like, fair. But, if you get a question about a "fixed annuity" on your test, remember that a fixed annuity is not a security. It's a pure insurance product. It pays a guaranteed rate of return to the investor backed by the insurance company's "general account." The equity indexed annuity is the one that will be considered a "security" starting in a couple of years.
The Rule is SEC Rule 151A, which amends the Securities Act of 1933. I have NO OPINION ON THIS TOPIC WHATSOEVER, remember. I'm just trying to help prepare you for a potential exam question.
Ouch. How will this affect the exams? As usual--who knows? NASAA doesn't put out memo's that help people know what will be tested. That would be, like, fair. But, if you get a question about a "fixed annuity" on your test, remember that a fixed annuity is not a security. It's a pure insurance product. It pays a guaranteed rate of return to the investor backed by the insurance company's "general account." The equity indexed annuity is the one that will be considered a "security" starting in a couple of years.
The Rule is SEC Rule 151A, which amends the Securities Act of 1933. I have NO OPINION ON THIS TOPIC WHATSOEVER, remember. I'm just trying to help prepare you for a potential exam question.
Friday, March 13, 2009
Test-Taking Strategy, A Facebook Confession
Facebook has been a great thing for me so far. I can place links to these blogs and other websites, and I can also update my status with "Robert is blogging for his Series 65 students at 5:30 on a cold morning in March," in order to mention my business as often as possible. Another connection to the business comes from all the quizzes that I receive from my old high school friends challenging me to "name that 80's band" or "name that 80's tune." I'm flattered that they think of me as someone to challenge to a quiz, and I also see an opportunity to put my test-taking strategies to the test. The first quiz I took was called "name that 80s band," and I have to admit, I was a little nervous. The first question had me up against the wall--it was a picture of a heavy metal band, and that was really not my forte. I actually thought of my customers at the testing center panicking over the very first question. In honor of them I took a deep breath and said, what are the four choices? We had: Scorpions, Black Sabbath, Dio, Judas Priest. Wow--talk about an advantage! Okay, first, the difficulty level of this facebook-based quiz can not be that freaking high; they would not put a picture of Black Sabbath here unless Ozzy were clearly visible--Sabbath was eliminated. A Judas Priest photo would have to have at least one guy on a motorcycle or wearing motorcycle garb, so Judas Priest was eliminated. Now I'm down to Dio and the Scorpions? What's the name of this quiz? "name that 80's band." Who was a bigger force in the 80's, the Scorpions or Dio? The Scorpions--I win. I now have a comment on my "wall" from the friend who sent me the challenge after seeing the score of 100%. He wrote, "How on earth did you know the name of the guy from the Split Enz?" Of course, I didn't. I just eliminated the wrong choices and then asked--who was a true "80's band"? And, what would this test want me to say? I also just got a 100% on a "name that 80's tune" challenge. On the first 9, I simply knew the answer. But I would have only gotten a 90% if I had not used process of elmination on the last one, avoiding "The Bangles" and choosing "Debbie Gibson," not because I have a clue what Debbie Gibson actually sang or looked like, but because "The Bangles" had one or two hits, and the title of the song in the question wasn't one of them. Always use the multiple choice format to your advantage. Always focus on eliminating wrong answers to improve your odds. Never indicate "single" for your facebook status unless your spouse has a really good sense of humor.
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