Suitability Unit 3

Gilles and Marielle Lachette are the lucky winners of the latest home lottery sponsored by their local children's hospital. The Lachettes sold their prize and received $500,000 in cash. They have come to you for advice. They want to take this money and use it to retire early. What do you tell them?

Ask them to sign the forms so you can invest their money right away and that you will complete the information later.

Let them know that you will be asking them a series of questions to learn about their situation so that you can recommend an investment strategy that will meet their needs.

Tell them that you will ask them a series of questions related to an investment product you sell to see if they qualify to invest.

Start off the conversation by assuring them that they can definitely retire early with this money.

You have a new client, Daniel Frost. During your meeting, the topic of risk comes up in your conversations. Daniel is quite adventurous in his personal life and feels that he is a risk taker. Which of the following actions would be appropriate?

Since Daniel is a risk taker in other aspects of his life, you should assume he is comfortable with a high risk portfolio.

In your experience, clients always say they are high risk until they lose money so you always put them as low risk on their know your client (KYC) forms.

You should explain to Daniel that risk is about his ability to withstand financial losses not just about his attitude.

You should inform Daniel that you will take his adventurous lifestyle into consideration but you are the professional and will determine what his risk level will be.

Which of the following statements about leverage is TRUE?

If a client has been approved by a bank for a loan it means leverage is a suitable strategy for him or her.

Leverage will magnify gains and losses.

Leverage is permitted by MFDA rules only for high net worth individuals.

If the investment does not perform, the client does not have to pay back the loan.

You have a meeting with Max, a prospective new client. Max is very busy and can give you only half an hour for the meeting. When you attempt to ask questions required by the KYC rule, Max becomes impatient and asks you to stop wasting his time and tell him which mutual funds are winners. What should you do?

Tell Max your five winners.

Insist on obtaining Know Your Client (KYC) information and let Max know that you cannot make a recommendation without the requested information.

Complete the application with the information you already have and make a quick recommendation.

Walk away from the meeting.

Under the Know Your Client rule, which of the items listed below is not essential to obtain from your client?

Tolerance for risk

Investment objectives

Investment knowledge and experience

Educational background

Which of the following regarding know your product (KYP) is TRUE?

You have failed in your KYP duties because you do not know enough about this new product to make a recommendation.

You have failed in your KYP duties because this new product is inappropriate for investors with moderate-to-low risk profiles.

You have satisfied your KYP duties because your dealer has already performed due diligence on these new products.

You have satisfied your KYP duties because you have matched a risk profile on the information sheet to that of your client.

Your client wants to take advantage of a period of low interest rates and make an investment using borrowed funds. Which of the following statements about leverage is TRUE?

Clients will always be able to use returns on their investment to pay the interest on their loans.

Due to interest payments, if an investment falls in value, someone using leverage will suffer a greater loss than someone who does not.

Using leverage is always a good idea since interest payments are tax deductible.

When interest rates are low, leverage is a suitable strategy for every client.

Your client, Roderick, likes to call you up and request transactions that you feel are unsuitable for him. What should you do?

Put through the order without question. Roderick is responsible for his own mistakes.

Put through the order because unsolicited trades do not require you to do a suitability assessment.

Inform Roderick that you believe the investment is unsuitable and then check with your compliance department on whether you can refuse the trade.

Tell Roderick you will refuse the order but do not explain why since he can use this information against you.

What step in the Strategic Investment Planning Process involves changing and evolving the investment plan over time?

Clarifying the client’s status, problems and opportunities

Identifying strategies and presenting the plan

Implementing the plan

Monitoring performance and updating the plan

Lou Romano, a financial planner, meets with his client, Reena Shah. Reena and Lou have already determined her investment objectives and gathered her financial data. Reena likes to read the business news and is eager to invest in the latest investment trend. She likes to call Lou with these ideas, but he is hesitant to endorse any investments that require a great deal of risk since Reena is an impatient investor. Where are Lou and Reena in the investment planning process?

Gathering client data and identifying objectives

Clarifying the client’s status, problems and opportunities

Identifying strategies and presenting the plan

Implementing the plan

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Suitability Unit 3

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