Just Get it Over With Already!

Many people fear public speaking. So, it's not surprising when they get up before a group and rush through their talk in order to remove the anxiety as quickly as possible. As a kid the only thing that truly scared me was something most people take for granted--getting a haircut. I'm not sure why, but I would procrastinate the inevitable date with the barber as long as possible, until finally I would get up the nerve to deal with the anxiety. As soon as the little paper collar went around my neck, I would grip the armrests tightly and hold on for dear life. Just get it over with, please. As I got older, I must have tried over a dozen hair stylists. Even though I cared about my appearance, I just wanted the haircut to be over with. Not surprisingly, I ended up with some of the worst haircuts imaginable. Senior year, somebody's older sister gave me short bangs with long hair in the back, but I told myself I didn't care--it had saved me the dreaded trip to the barber or hair styling salon, so it was fine.
Nonsense. All I was doing was ignoring the big picture. The big picture was that I had hair, that this hair would have to be cut every so many weeks, and that I would, therefore, have to learn to deal with haircuts. Similarly, you have a painful stimulus to deal with called the Series 65 or Series 66 exam. Unfortunately, these tests are designed to make you perform at the testing center, eliminating wrong answers and thinking creatively, even when your palms are sweating and your tongue is thick with fear. I know, I know. You don't wanna, same way I didn't wanna get my haircut. And, the same way I would let Johnny Jedder's older sister ruin my hair at age 18, you are probably rushing through the practice questions with only one focus in mind--getting it over with.
Sorry. Until you are ready to sit down in the chair and work through practice questions for as long as 1 minute or more each, you will be spinning your wheels, just trying to make the pain go away.
I'm going to write about test-taking strategies up ahead, but the first step is to learn to accept the anxiety and learn to work through the questions in spite of it. Because unless you are already a CFP or PFS, dear friend, you can't just make it all go away the way I did:

The nuclear option

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.

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.

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

What is the Series 65 or Series 66 exam really like?

Your Series 65 or Series 66 exam will cover many different topics in many different ways. While it's not possible to say for sure whether CAPM or  Sharpe ratio will show up on your exam, we know FOR SURE that certain types of questions are all over this thing. I just took the Series 65 exam yesterday and saw around 27 questions from the Uniform Securities Act and business practices under the NASAA model rule on unethical business practices for RIAs, IARs, etc. That's a large chunk of questions, many of which look like the following:

Which of the following statements is accurate concerning registration issues for agents under
the Uniform Securities Act?

A. If the individual represents the issuer of the securities involved in the transaction, he is not an agent
B. If the individual represents the issuer of exempt securities, he is not an agent
C. If the individual is not regularly employed by the issuer, he is not an agent
D. If the individual represents the issuer in any exempt transaction, he is not an agent


EXPLANATION: if the individual represents the issuer of the securities in the transaction, he MIGHT have an exemption available. But, it certainly isn't based on the fact that he represents an "issuer." An "issuer" is any person who issues or proposes to issue any security. Could be a well-known-seasoned-issuer like SBUX or just some sleazy dude sitting at the booth talking about investment opportunities in his uncle's oil and gas wells. You represent that guy and, trust me, there is no exemption available and also nothing good for your career up ahead. However, if the issuer is the United States Treasury, or the State of Iowa, or a bank, savings institution, or trust company, then the individual is representing the issuer of exempt securities. So, as long as the security is exempt, he's not an agent? Not quite--the Uniform Securities Act says he's exempt if we're talking about five specific types of exempt securities, not all of them. The Act says that if the transaction is exempt, he's not an agent, period. So, the answer--which many would think is B--is actually . . . D

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How does the fiscal cliff affect the Series 65 exam or Series 66 exam?

I've received many concerned emails asking how the Series 65 exam and Series 66 exam will change due to the "debt ceiling" or the "fiscal cliff." First, it's unlikely the exam expects anyone to know the exact tax brackets currently in use. However, the exam might want you to know that ordinary income rates are usually higher for investors compared to the tax rates on qualified dividends and/or long-term capital gains. None of that changed with the new legislation Congress passed. The new legislation keeps the 10%, 15%, 25%, 33%, and 35% brackets, then it adds a 39.6% bracket on the income above $400,000 or so. I can't see how that leads to a test question. Qualified dividends and long-term capital gains are still taxed at just 15% . . . except for folks who hit that top 39.6% tax bracket--they have to pay 20%. Which stinks for them, but also means the testable point remains the same--their long-term cap gains and qualified dividend tax rates are only about 1/2 their marginal rate. Of course, I wouldn't say that to their face or anything.
What's really wild is that the maximum contribution to a Coverdell account would have dropped to just $500 if Congress had not acted, proving they do get a lot of things right on Capitol Hill, in spite of appearances. That remains at a whopping $2,000 per-child per-year. So, even that factoid did not change.Bottom line--the recent shenanigans on Capitol Hill do not appear to impact your exam much. They may, however, impact your tax situation, which is, of course, not our department. Pass the 65 Now!

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?

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