GDP vs. GNP

The exam might want to split hairs with you on the difference between GDP and GNP (Gross National Product). Gross National Product for the U.S. would count the production of U.S. workers stationed here as well as working overseas for American companies. Gross Domestic Product counts what is produced domestically, by both U.S. workers and foreigners working here in the United States (even for foreign-owned companies like Toyota and Mitsubishi). So, GNP tells us how much American workers are producing, wherever they’re stationed, while GDP tells us what is produced here in America, whoever is doing that work. Get Solid Series 65 Sample Questions

Common Mistakes Made by Series 65 and 66 Candidates

With few exceptions, the following ERRONEOUS notions are held by people heading to the exam center:

1. Everything is covered by the Uniform Securities Act's anti-fraud statute
2. Agents can not use the word "guaranteed"
3. As long as they have no more than 5 clients, the RIA or IAR are exempt from registration
4. Investment advice has to be on specific securities to count as "investment advice"
5. The word "fee" = investment adviser or IAR; the word "commission' = broker-dealer or agent

Let's take them one at a time. Number 1--the investment has to meet the definition of a "security" to be subject to anything under a securities act, right? Whole life insurance and fixed annuities are not securities and, therefore, not covered by the Uniform Securities Act. Period. Number 2--broker-dealers can't guarantee investors against a loss; however, all US Treasury securities and a small handful of corporate bonds are guaranteed. The agent simply has to explain what the "guarantees" do and do not involve. US Treasury securities are guaranteed as to interest and principal by the US Treasury. A guaranteed corporate bond or preferred stock has a third party promising to make up any payments the issuer cannot make. Number 3--the much more important fact is whether they have a physical presence/place of business in the state. If they do, they register, regardless of the number or type of clients they serve. Number 4--the advice can be extremely general in nature, but if it is specific to the client to whom it is given, then it becomes investment advice. If a sports agent tells his client to put 1/3 into real estate, 1/3 into insurance products, and 1/3 into securities, that is investment advice. It involves securities and it's specific to the client. Number 5--the question is, "How are they functioning?" Are they compensated to tell people to buy or sell securities? If so, they're functioning like an investment adviser, even if they only earn commissions when clients buy the products in the financial plan delivered for "free." You hold yourself out as a financial planner, the regulators take your word for it. On the other side, agents earn 12b-1 fees, and these fees are a % of assets, yet these things are still just commissions or "asset-based sales charges." If the agent is getting compensated to sell securities, he's not acting as an investment adviser.Need Help with your Series 65?

Same Thing Only Different

Just finished a morning tutoring session and noticed that the client had some trouble recognizing when a different question was asking the same thing as a previous question he had already nailed. Most people get this first question wrong, but today's tutoring client nailed it in about 10 seconds:

An investor purchased shares of a growth & income fund in early February this year.  In late December this year, she receives a capital gains distribution from the fund.  Therefore
a.this represents a tax-free return of capital
b.the capital gain is tax-exempt to the investor
c.the capital gain is treated as a short-term capital gain
d.the capital gain is taxable at long-term capital gains rates

So, since he nailed that one, I assumed he'd also get this one right:


Which of the following represents an accurate statement concerning the tax implications of mutual fund investing?
a.municipal bond mutual funds distribute tax-free long-term capital gains
b.capital gains distributions are determined by the fund's holding period, even if the investor has held the shares for less than one year
c.because the mutual fund provides a 1099 form, the investor is relieved of the responsibility to report dividend income to the IRS
d. all dividends distributed are currently taxed at a maximum of 15%

Notice how answer choice b is explaining exactly why the client got the first question correct? In the first question, the cap gains distribution was long-term because it was based on the fund's holding period--not the investor's. Why then didn't answer choice b scream out to the candidate?
Not sure. He knew answer a was wrong. He knew C was BS. But, still, he couldn't choose answer b here.
Maybe he was tired. But, at the testing center I'm hoping he will keep struggling with a question until he sees it in its proper light. For a lot of you, that isn't happening yet because you're only spending 15 seconds on a question. You want to know the answer without figuring out the question. That doesn't work, people. Be willing to figure out the questions, and you will end up getting licensed. HelpWithSeries65Exam

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

What Kind of Questions Are on the Series 65 or Series 66?

Are you comfortable with a question like this?

The definition of "expected return" would relate to which of the following?
A. Sharpe ratio
B. CAPM
C. Beta
D. Term life insurance

Okay, step one--what kind of return does one expect from a life insurance policy that has NO CASH VALUE?
None--eliminate Answer Choice D just because it's kind of smart alecky and sticks out like a sore thumb. Okay, Beta doesn't really try to predict, and isn't a "return" measurement. It just tracks the movement of one part of the index with the overall index--is MSFT more volatile or less volatile than the overall index it belongs to? About even, as it turns out, which is not the point--the point is, eliminate Answer Choice C. Excellent, now you're sitting 50-50. Unfortunately, this is where many of my tutoring clients blow it. They're tired now, cranky. They don't LIKE the Series 65 or Series 66. Uh-huh. I didn't like reading all the new crap from Dodd-Frank, but it seemed to be part of my job description, so let's stop wasting time here and get the job done. What is the Sharpe ratio? It's a risk-ADJUSTED return measurement. It measures the return that's already happened, adjusting it for the risk encountered. It can't possibly be predicting an EXPECTED return, right? So, even if you can't recall the definition of  CAPM (which is kind of lame, actually, but who cares), you simply eliminate Answer Choice A, and you win. CAPM measures expected return in a very interesting way--google the formula for extra credit. Need Series 65 Questions? Series 66?

What is a Brady Bond?

Some of you might see a question about Brady bonds, so let's cover it quickly here. First, these bonds are issued by developing/emerging market governments. Second, they are payable in US dollars. Third, they are often collateralized by US Treasury securities. Fourth, most issuers are Latin American nations. Finally, although these bonds are associated with emerging market issuers, they are among the safest bonds in that category. Need a Tutor?

What is a SOLE PROPRIETOR?

The trouble with being in business as a sole proprietor is that you remain personally liable for the debts and lawsuits against the business. You have not created a separate legal entity—you and the business are one and the same. If the sole proprietorship called Mary's Muffins accidentally sells ten dozen tainted blueberry muffins that send swarms of sick people to the ER, Mary is in a whole lot of trouble. All the lawsuits will be filed against her personally, and the creditors who used to spot her flour, oil, sugar, etc., are going to come after Mary personally for any unpaid bills. Also, some students seem to think the term "sole proprietor" means "no employees." Not at all. It just means that when it comes to the ownership of the business, there is only one individual human being, with no actual separation between him and his business. Believe it or not, some broker-dealers and many investment advisers are owned as sole proprietorships.  To protect assets, there is always insurance.  But, to be a sole proprietor without sufficient liability insurance for damages one might cause; that is risky business. I often marvel that as a high school and college student I owned a small, not-quite-lucrative carpet cleaning business. At one point, I called it Dunwell Cleaning, because that sounds like a business, doesn't it? It was really just an assumed name, and I had to publish a text ad in the local newspaper that probably no one in the greater Champaign-Urbana area ever read announcing that Robert Walker is now doing-business-as (DBA) Dunwell Cleaning. I received an assumed name certificate from the county so that I could open a bank account in my name "DBA Dunwell Cleaning" and customers could write checks to a business as opposed to some 22-year-old kid named Bob. The liability I took on entering people's homes, businesses, and sorority houses was actually huge in retrospect--I could have ruined thousands of dollars of carpeting, or maybe somebody trips over the extension cord I'm using on the second floor and gets seriously injured, or maybe some hysterical customer calls at 2 AM screaming that her children have been rushed to the ER due to an allergic reaction to the spot remover I sprayed all over the poor kids' bedrooms. Luckily, I was just smart enough to buy some liability insurance that would have paid out on some of those claims, although--now that I think of it--I had no assets at the time, so what the heck was I protecting? Anyway, if one does have assets (nice houses, cars, stocks, bonds, and annuities, etc.) one needs to think long and hard about doing business as a sole proprietor. Without the right insurance coverage, sole proprietors can easily end up losing everything they own over a lawsuit or bankruptcy filing. NEED HELP WITH YOUR EXAM?