Financial Terms

Series 65 Section 3: Client Strategies

Client Investment Recommendations and Strategies - 30% of the exam, 39 of 130 questions.

Client types and profiles, capital market theory, portfolio strategy, taxes, retirement plans, ERISA, special accounts, ownership and estate planning, trading, and performance measurement.

The Series 65 has 130 scored questions (plus 10 unscored), runs 180 minutes, and requires 92 correct answers to pass (70.8%). This section covers 116 of the terms in our glossary.

Sample questions

Answers and explanations are shown below each question. The study app has 39 questions for this section, with timed full-length exams.

Which of the following is a requirement for a business to be taxed as an S corporation?

  1. It must have at least 100 shareholders
  2. It may have no more than 100 shareholders and only one class of stock
  3. It must be publicly traded
  4. Its shareholders may include foreign corporations

Answer: It may have no more than 100 shareholders and only one class of stock — S corporations are limited to 100 or fewer shareholders - generally US citizens or residents - and one class of stock. In exchange, income passes through to shareholders, avoiding the C corporation's double taxation.

Before accepting instructions for a new trust account, an adviser should first confirm:

  1. the beneficiaries' personal risk tolerance
  2. that the grantor approves each trade
  3. the trustee's authority to act, as set out in the trust agreement
  4. that the trust is irrevocable

Answer: the trustee's authority to act, as set out in the trust agreement — The trustee's powers come from the trust document, which governs what investments and actions are permitted. Beneficiaries do not direct the account, and revocable trusts are just as common as irrevocable ones.

What should an investment adviser representative do FIRST when beginning to work with a new client?

  1. Recommend a diversified portfolio of index funds
  2. Gather the client's financial and nonfinancial information
  3. Determine which products pay the highest compensation
  4. Execute trades to put idle cash to work

Answer: Gather the client's financial and nonfinancial information — No recommendation can be suitable, let alone in the client's best interest, without first knowing the client's goals, finances, taxes, risk tolerance, time horizon, and other circumstances.

A client refuses to sell a stock that has fallen from $80 to $45, saying they will sell 'once it gets back to $80.' This is an example of:

  1. anchoring
  2. herding
  3. mental accounting
  4. overconfidence

Answer: anchoring — Anchoring is fixating on a reference point - here, the purchase price - that is irrelevant to the stock's future prospects. Loss aversion usually accompanies it.

Practice this section Study its terms

Terms in this section

Long Position You own the asset and profit when its price rises. Short Position (Short Selling) You borrow shares, sell them, and profit if the price falls. Margin Borrowing from your broker to buy securities, using the account as collateral. Cash Account An account where every purchase is paid for in full, no borrowing. Leverage Using borrowed money to increase exposure relative to your own capital. Initial Margin (Reg T) The equity you must put up to open a margin position - generally 50%. Maintenance Margin The minimum equity percentage you must keep in a margin account. Margin Call A demand to add cash or securities after equity falls below maintenance. Short Squeeze Rising prices force short sellers to buy back, pushing prices higher still. Covering (Buy to Cover) Buying shares back to close out a short position. Naked Short Selling Selling short without first borrowing or locating the shares. Market Order Execute immediately at whatever price is available. Limit Order Trade only at your specified price or better. Stop Order (Stop Loss) A dormant order that becomes live once a trigger price is touched. Bid-Ask Spread The gap between the best buy price and the best sell price. Liquidity How quickly an asset converts to cash without moving its price. Slippage The difference between the expected price and the actual fill. Settlement (T+1) The day the trade actually closes and cash and shares change hands. Sequence of Returns Risk The risk that poor early returns in retirement permanently damage a portfolio. Risk Tolerance vs. Risk Capacity Willingness to bear loss versus financial ability to absorb it. Asset Allocation How a portfolio is split across stocks, bonds, cash, and alternatives. Rebalancing Periodically restoring the portfolio to its target weights. Dollar-Cost Averaging Investing a fixed amount on a fixed schedule regardless of price. Modern Portfolio Theory (MPT) Optimize the portfolio as a whole, not security by security.

See all 116 terms in the glossary

Memorizing figures? The Series 65 numbers cheat sheet lists every threshold, deadline and limit in one place, and the formulas page has calculators for the math questions.

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