Asset Allocation and Diversification for the Series 65 and Series 66 exams

A diversified portfolio of stocks would not contain all technology or pharmaceutical companies, for example. If there were a number of oil company stocks, they would be diversified between domestic and international companies, producers of oil and refiners of oil. They would not all be small cap or large cap. A bond portfolio would not be all triple-A-rated or all junk, but would instead be diversified throughout different maturities, credit quality, and issuers that don’t all come from the same industry. Asset allocation and diversification are somewhat related portfolio management techniques. Where they differ is that asset allocation puts set percentages of capital into various types of stocks, bonds, and cash to achieve strategic goals in regards to risk and reward. Within those allocations, we use diversification to balance the risk of one investment with the characteristics of another. So, 20% large-cap growth, 20% mid-cap growth, 30% small-cap growth, and 30% long-term bond is an asset allocation. Drill down into the “20% large-cap growth” category, and the various companies owned would come from different industries in order to maintain diversification.

Don't Make Assumptions

Some exam candidates want quick black-and-white answers. If they read something about "10 years" in terms of the Administrator's ability to deny/suspend/revoke a license, many want to memorize that number and apply it automatically. Unfortunately, it doesn't work that way--sometimes people are let into the industry in spite of recent felonies, and sometimes people with certain misdemeanors are kept out indefinitely. The idea is that if you apply for a license and have felony convictions or specific misdemeanor convictions, the state can use those facts to deny your application, unless they decide otherwise. In the textbooks I mention that LLCs are associated with "limited life," unlike corporations . Many exam candidates become uneasy at that statement. Wait--wait! My brother owns an LLC and it doesn't expire on any particular date! That's not quite what we're saying. In an LLC the operating agreement has a section called "Dissolution and Termination." In an LLC of which I am a member, this section states that the whole thing will be dissolved either on the date fixed for termination or by unanimous written agreement by the members. If the LLC were formed to produce a movie, we would dissolve it fairly quickly. On the other hand, if we were Five Guys Burgers and Fries, LLC, we would have no plans to shut down anytime soon, but their operating agreement surely lists certain events that would trigger dissolution of the LLC. Of course, as a private company, that is not information available to the general public, so I will not make the mistake of bothering them with an email. In any case, take in new information slowly and thoughtfully. Avoid jumping to conclusions. Did you just read that you can avoid a penalty, or did you think the text said you could take the money out tax-free? Big difference, right? The exam will exploit our tendency to rush through the questions. Your job is to slow everything down both as you study and as you take--and pass--your Series 65 or Series 66 exam.

SEC Issues Stop Order to Prevent Northern California Company From Issuing Stock

Just like the Administrator at the State level, the SEC sometimes issues stop orders when they don't like what they see--or don't see--in a registration statement for an offer of securities. Let's take a look: Washington D.C., April 23, 2014 — The Securities and Exchange Commission today issued a stop order to prevent a Northern California-based company from issuing stock after including false and misleading information in its amended registration statement for an initial public offering (IPO). Stop orders prevent the sale of privately held shares to the public under a registration statement that is materially misleading or deficient. If a stop order is issued, no new shares can enter the market under that registration statement until the company has corrected the deficiencies or misleading information. According to the SEC’s stop order against Comp Services Inc., its registration statement fails to disclose the identity of the control person and promoter behind the company, and falsely states that Comp Services earned revenue for providing computer services even though the company has never earned any revenue. The registration statement has been amended 10 times, most recently in December 2013. “Comp Services gave investors a false and misleading portrayal of the company as they were deciding whether or not to invest,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office. “This stop order ensures that Comp Services stock cannot be sold in the public markets under this misleading registration statement.” Comp Services consented to the issuance of the stop order, which also triggers the bad actor disqualifications to prohibit Comp Services from engaging or participating in any unregistered offering conducted under Rule 506 of Regulation D for a five-year period. The SEC’s investigation, which is continuing, has been conducted by Roberto Tercero and Spencer Bendell in the Los Angeles office.

Insurance agents giving investment advice in the State of Tennessee

Insurance agents selling fixed and indexed annuities have been operating in a gray area in many states for many years now. The definition of "investment adviser" under state securities law, remember, looks something like this:“Investment adviser” means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as a part of a regular business, issues or promulgates analyses or reports concerning securities." Right there, you can probably see how easy it would be for a state regulatory office to determine that an indexed annuity salesperson is in the business of advising others. . . as to the advisability of . . . selling securities. Therefore, he is not acting just as an insurance product salesman; he's acting as an unregistered investment adviser if he tells people to liquidate mutual funds and put the proceeds into his safe-money product. While many states wait for someone to step out of line and then handle it on a case-by-case basis, the State of Tennessee has come right out and stipulated what an insurance agent can do versus what a securities representative can do. As we see from their bulletin "Licensing and/or Registration Requirements and Permitted Activities," an "Insurance-Only Person" and a "Securities-Only Person" cannot engage in the same activities. The bulletin, at http://www.tn.gov/securities/documents/InfoPostWebREQUEST052213.pdf is something I encourage you to read regardless of your state. While you might be surprised to see what is prohibited for an "insurance-only person," you might also be surprised to see the prohibitions for those who are considered "securities-only persons." For example, a securities-only person may NOT "discuss the cost versus benefits of insurance in specific terms" and may NOT recommend specific allocations, in dollars or percentages, between insurance and securities investments. Probably more important, though, an insurance-only person may NOT discuss risks specific to the consumer's individual securities portfolio and may NOT recommend the liquidation of specific investments/securities to fund the purchase of an annuity/insurance product.

What does "per capita" mean in estate planning?

A quick follow-up to the post on the term "per stirpes" here, since the Series 65 exam and Series 66 exam could easily bring up the terms. If a will or revocable trust states that the beneficiaries inherit their shares "per stirpes," if a beneficiary has died by the time the deceased passes on, his or her share will go to his or her descendants. That way, if there are three beneficiaries, the estate will be divided into thirds, period. On the other hand, if the beneficiaries inherit their share of the estate "per capita," a "head count" is taken of all the living beneficiaries at the time of death. If there are three beneficiaries named in the will or trust but one has already died, then the assets are divided among just the remaining two.

Online Classes for Series 65 and Series 66 Exams

No matter which materials you have, I recommend that you sign up now for our live online classes for the Series 65 and Series 66 exams. We present the exam material in digestible bites of information that you can review on your own time at your own pace by watching the recording. No instructor-at-the-whiteboard or talking heads. This is full-color animation, photos, and voiceover, making the material understandable and often interesting.
Seriously. Best of all, you can ask questions during the session!
Use the link at the end of this post to get on board and put the Series 65 or Series 66 exam behind you. Sign Up Now!

What is Per Stirpes, Please?

The Series 65 and Series 66 exams ask a handful of questions about estates and trusts, and you could end up seeing the phrase per stirpes on a test question. In fact, you'll likely bump into it in your financial planning activities, so it is worth knowing even if it doesn't show up. As I just pulled from a Transfer on Death Beneficiary Agreement for a brokerage account, " the term 'per stirpes' shall mean the following:
if any primary or contingent Beneficiary does not survive the account owner, but leaves surviving descendants, any share otherwise payable to such Beneficiary shall instead be paid to such Beneficiary's surviving descendants."
And, there you have it. If a will, a trust, or a transfer on death account name a beneficiary, the term "per stirpes" means that if that beneficiary is to be paid but has passed away, his or her share passes to his or her own beneficiaries. Pass the Series 66 exam