Practice Question on the 2nd Prong

Practice question on the 2nd prong

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.


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Series 65 Question

Series 65 Question

This Tuesday let’s a practice question that could easily show up on your Series 65 or Series 66 exam:

A state-registered investment adviser must do all of the following except
A. file an audited balance sheet with the Administrator if the adviser uses a qualified custodian
B. file an audited balance sheet with the Administrator if the adviser maintains custody
C. file an unaudited balance sheet with the Administrator if the adviser has discretion but not custody
D. file an audited balance sheet with the Administrator if the adviser accepts prepayment in excess of $500 six or more months in advance

EXPLANATION: NASAA tends to pull some factoids from their own model rules and policy statements that no normal human could have expected. I could easily see them expecting you to have read their model rule called “Financial Reporting Requirements for Investment Advisers,” and, even though they swear their exams don’t reward memorization … well, whatever. Turns out, if the adviser has custody or accepts prepayment, they need to file an audited balance sheet, complete with an opinion by the CPA, with the Administrator. If the adviser has discretion but not custody, the balance sheet must be filed, but it does not have to be audited, saving the adviser the expense of paying a CPA firm to review the adviser’s books. If the adviser does not have custody, we assume it does not have to file an audited balance sheet..



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Your first week for the Series 6, 7, 63, 65 or 66 is FREE – Classes begin on September 10th

We are now holding Live Online Classes every week  for the Series 6 7 63 65 or 66 is FREE – Classes begin on September 10th  Thereafter, each regular class is only $29.95 for 1.5 hours of instruction and Q&A, and each session starts at 12:00 PM CDT weekdays and at 10:00 AM CDT on Saturdays.

Our classes, taught by the author Robert Walker, use the same famously simple PLAIN ENGLISH style as the rest of our test prep books and materials. Click here to sign up for a free sample of the materials and Check out what our customers are saying about the program.

Series 65, 66, 63, 6 & 7 Live Online Classes Starting Soon

Even though some customers are fine with the whole self-study approach to the Series 65, 66 and other exams, we’ve received enough requests from those who want a live class to go ahead and launch one starting September 10th.

How would you like to take in the Series 65/66 material in 90-minute online sessions that allow you to ask the author questions? Miss a session–no problem, just watch the recording when it’s convenient.

To get on the bus, please click this link:




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. Click here for help on the 65

Practice Question, investment risks

Practice Question, investment risks

The Series 65/66 exams don’t like to give you a lot of questions that prove only that you’ve memorized something. You’d never know that from attending many of the live classes across the country, but, I assure you—it’s true. NASAA doesn’t like a lot of memorization. For example, you don’t get to simply memorize “ADR = foreign stock, domestic market.” You have to tell them how an American holding an ADR would be affected if the US dollar depreciates relative to the foreign currency. Similarly, you can’t just memorize that zero-coupon bonds have “high duration” or a lot of interest rate risk. You have to know that much in order to think outside the box and apply that knowledge on a fun question like this:

If an investor purchases a 10-year US Government zero coupon bond that he plans to hold to maturity, the most important investment risk is

A. market risk

B. interest rate risk

C. purchasing power risk

D. reinvestment risk
EXPLANATION: zero coupon bonds have no reinvestment risk because there is no cash flow coming in every six months to reinvest at varying rates. Eliminate that choice. Market risk is always a problem because investors can definitely panic like a herd of buffalo—but the question says he’s going to hold the thing until maturity. What does he really care about the market price if he isn’t going to sell? Doesn’t that also eliminate “interest rate risk,” which sends the market price down when rates rise, but, again, he has no plans to sell? Yes. I think. I mean, at least I have some pretty solid reasons to eliminate those two answer choices. Can I eliminate “purchasing power risk”? No—he’s locked into a fixed rate of return over 10 years. Who know where inflation will be?
That’s the type of thinking you’ll have to do on the exam. You won’t know for sure if you’re on the right path. Your job is to see if you can eliminate answer choices until you get down to the one you can’t eliminate. That one is the right answer.

ANSWER: C                                Click here for help with the 65

Tough Question on Retirement Accounts

Tough Question on Retirement Accounts

Let’s look at a tough practice question early on a Saturday morning:

Which of the following are examples of tax-free withdrawals from a Traditional Individual Retirement Arrangement for an individual 52 years of age?
I. first-time purchase of a primary residence
II. certain medical expenses
III. certain educational expenses
IV. series of substantially equal periodic payments under IRS Rule 72t
D. none of the choices listed

Did you choose Answer C? No? Answer A? Maybe you saw the trap and chose the correct answer, which is Answer … D. None of the choices listed. See, the four Roman numerals given are examples ofpenalty-free withdrawals from an IRA, but, the more important concept is that withdrawals from your Traditional IRA are taxable. If they come out prior to age 59 1/2 they are also penalized, unless there is a provision allowing the individual to take out some money without paying that penalty. If you want to take up to $10,000 out of your IRA to buy your first residence, you will not be penalized; however, you will add the $10,000 to your taxable income for the year and pay your marginal tax rate on it. Same for the other three choices.
Not all questions are trick questions, but you need to look them over to make sure there is not a trick before proceeding.
If you would like more information on IRA’s use the link below. If it doesn’t work, click on the title of this post and then type in “publication 590” at the IRS website. I think the following link will take you right to the publication, though:

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Open and Closd-Ended Funds

Open and Closed-End Funds


How about a fun practice question for all you series 7 takers out there …

Open- and closed-end funds share none of the following characteristics except that:
A. open-end funds must be “diversified” according to the 75/5/10 rule
B. closed-end funds must be “diversified” according to GAAP accounting rules
C. closed-end funds are non-redeemable investment company securities
D. open-end funds may issue preferred share

EXPLANATION: once again, a mildly confusing topic can become massively confusing if the question is written a certain way. Oh well. Take a deep breath, look at the question from a different angle, and proceed to kick its butt. Do open-end funds have to be diversified? Heck no—it’s just that if they want to call themselves “diversified,” they have to follow the SEC rule. Closed-end funds don’t have to be diversified, either, and even if they did “GAAP Accounting” is nonsense … so you can now eliminate the first two answer choices. Boom. See anything wrong with Choice C? Me neither, but let’s not make our move too soon. What about D? Isn’t it the CLOSED-end fund that might issue preferred shares to use leverage? Yes. D is false. The answer must be …



Another Tough Options Question

Another Tough Options Question

As I was saying in today’s Friday Free Broadcast, the Series 7 questions on options will often not involve calculations. For many people, questions similar to the one below are among the most difficult because they force the test taker to really know how options work:

Which of the following option series trades at the highest premium?
A. ABC Apr 30 put
B. ABC Apr 40 put
C. ABC May 45 put
D. ABC Jun 45 put

Okay, it seems there may be information missing. Unfortunately, there isn’t. No stock price provided in the question? There’s your clue—it can’t matter what the stock price is. The test is hard, but it’s not a rigged game. If the stock price were required to answer the question, it would be provided. It wasn’t provided, so it doesn’t matter. Why doesn’t it matter? Because puts with higher strike prices are worth more money, period. No matter where the stock is right now, the right to sell it for $45 is worth more than the right to sell it for $40 or $30. So, the answer has to be the May 45 put or the Jun 45 put. Which one gives the buyer more time to win? The Jun 45 put. That’s the one that’s worth the most.

Answer: D

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Difficult Options Question

Difficult options question

The so-called “T-chart” is useful when you have to track money-in and money-out on an actual series of transactions, or a series of potential transactions. The following question requires a T-chart and some good, creative problem-solving:

If an investor purchases 100 ABC @44, then writes 1 ABC Aug 45 call @2 and 1 ABC Aug 45 put @2.50, his maximum loss is
A. $450
B. $100
C. $8,450
D. $4,400

EXPLANATION: if the stock goes up and gets called away at $45, that’s actually the best that can happen and would be his maximum gain. The worst that can happen is that the stock drops to zero, a loss of $4,400. Then, he’d have to give some clown $4,500 for a worthless stock when the put is exercised. That’s $8,900 out, with only $450 coming in for selling the straddle.

ANSWER: C       Click here for help with your series 7