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The Series 65/66 exams definitely consider limited and general partnerships to be fair game, as they indicate on their exam outlines. How would you navigate a question like this one …
Which of the following is an accurate statement of the business structures known as “general partnerships” and/or “limited partnerships”?
A. only limited partnerships allow for direct flow-through of income and expenses
B. both ownership structures leave at least some owners with unlimited liability
C. general partnerships are no longer enforceable effective January 1, 2011
D. general partnerships relieve the owners of personal liability
EXPLANATION: a general partnership is really just a sole proprietorship with more than one owner. These folks want to go into business together, so they form a general partnership. It does provide for flow-through of income and expenses, but it also leaves all general partners personally liable for debts and lawsuits of and against the business. To form a limited partnership, you have to have at least one general partner (GP), and GP’s always have unlimited liability. Don’t read a choice like Choice C and automatically assume you forgot to study something. The Exam occasionally makes stuff up to see if you’ll fall for it when a much better answer was available. Don’t do that. Instead choose answer …
Happy Friday everyone, let’s end the week with a practice question. The exam will likely ask you 3 or more questions on variable annuities. How would you answer something like this:
Which of the following statements is/are true of non-qualified variable annuities?
I. the annuitant’s return of principal is guaranteed
II. the annuitant’s net deposits into the account equal her cost basis
III. the annuitant is subject to penalties on withdrawals prior to age 59 1/2
IV. the annuitant is subject to penalties if withdrawals do not commence by age 70 1/2
B. II, III
C. I, IV
D. II, III, IV
EXPLANATION: choice “I” is true only during the accumulation phase due to the death benefit, but the statement falls apart during the annuity phase and, therefore, has to be eliminated. The variable annuity does not promise a return of principal, which is one of the risks disclosed in the prospectus and sales literature. If the annuitant dies during the accumulation period, the beneficiaries receive at least what he put in, but when the contract is annuitized, there is no guarantee on what will be received. So, eliminate choices A and C. Now, you get II and III for free because they are both in the remaining two choices. The only difference between B and D is that one contains choice “IV” and one doesn’t. So, do withdrawals have to begin at age 70 1/2? Even though the 10% early withdrawal penalty is there, the annuitant does not have to start taking money out at age 70 1/2… not on a non-qualified variable annuity. Choice D is eliminated, leaving you with …
Also remember that a qualified variable annuity would be subject to lifetime maximum contributions and would force the annuitant to begin withdrawals at age 70 1/2. So, as always, read each test question very carefully.
As I’ve written, I’m not sure why investors would allow their investment adviser to also maintain custody of the account assets. I mean, if the investments are doing poorly, what’s to stop the adviser from making up his own numbers, or—worse—making withdrawals out of dividend and interest income that the client never finds out about?
But, some advisers do have custody. If so, the firm has to maintain a minimum net worth. NASAA says in one of their model rules that the minimum net worth for such an adviser is $35,000. They then define “net worth” in frightful legalese. Let’s imagine what a test question might look like on the Series 65/66 exam:
Hickory Stick Advisory Partners are deemed to have custody of client assets. When filing their balance sheet, the firm should include in its assets which of the following items?
A. prepaid expenses
B. loans to a senior partner
C. loans to a silent partner
D. marketable securities
EXPLANATION: the NASAA model rule on minimum financial requirements for advisers specifically tells advisers not to include prepaid expenses or loans to partners—if the firm is a partnership—or to officers or stockholders—if the firm is a corporation. Seems like a good idea to me. If the advisory business is doing poorly, what are the chances that the partners are doing well enough to repay the loan they took out? Talk about some shaky assets. Marketable securities have a value—they are an asset.
Let’s try to apply what we’ve been discussing about the “three-pronged approach” to the following practice question:
Which of the following least likely meets the definition of an “investment adviser”?
A. an individual who merely rents a billboard in State A announcing the availability of “total financial planning services”
B. a financial planner limiting her services to budgeting, bill paying, and credit score improvement
C. a newsletter writer who covers mid-cap technology stocks and sends the newsletter to paid subscribers based on market index movements
D. a geological engineer who charges a flat fee to help investors determine promising royalty trusts and limited partnership interests involved with oil & gas exploration
EXPLANATION: the phrase “holding itself out to the public” often messes with people. But, the individual who rents a billboard is doing exactly that—holding herself out to residents of the state as being in the business of providing investment advice. Close enough—she’s an adviser. The newsletter writer loses his exclusion by blasting out his so-called “newsletter” based on “market developments.” He’s only a newsletter writer if he’s publishing a newsletter that goes out to a general audience on a regular circulation—if the thing goes out based on market developments, he’s an adviser. The engineer would not be an adviser if he’s merely telling partnerships whether there is or is not oil/gas underground worth trying to extract, but this guy is telling investors what to invest in, for compensation. He is also an adviser. While “financial planners” usually do meet the definition of “investment adviser,” that is only if part of their service involves securities. If, on the other hand, they keep it to non-securities matters, they escape the definition.