Client Investment Recommendations and Strategies — Series 66 practice questions

The federal annual gift tax exclusion allows a donor to give any number of recipients up to a set amount each year:

1. Without needing to file a gift tax return or reduce the donor's lifetime exemption
2. But only if the recipient is a lineal descendant such as a child or grandchild
3. As long as the total across all recipients combined does not exceed the annual limit
4. Only once during the donor's lifetime per individual recipient across all years

Answer: A — Without needing to file a gift tax return or reduce the donor's lifetime exemption

A) Correct — gifts within the annual exclusion per recipient require no return and don't reduce the lifetime exemption. B) The exclusion applies to any recipient, not just descendants. C) The limit applies per recipient, not aggregated across all recipients. D) The exclusion resets and applies every year, not once per lifetime.

Strategic asset allocation is best described as which of the following approaches?

1. Continuous adjustment of allocation based on changing macroeconomic outlook forecasts
2. Short-term active bets deviating from target allocation to exploit perceived opportunities
3. Long-term target allocation across asset classes based on objectives and constraints
4. Concentrated allocation to the single asset class expected to outperform in the next year

Answer: C — Long-term target allocation across asset classes based on objectives and constraints

A) Dynamic. B) Tactical. C) Correct — strategic = long-term policy. D) Not an allocation strategy.

Alpha in the context of portfolio performance is best defined as:

1. The total return of the portfolio expressed as an annualized percentage figure
2. The standard deviation of the portfolio's returns over the measurement horizon
3. The excess return above the return predicted by CAPM given the portfolio's beta
4. The correlation coefficient between the portfolio and its designated benchmark index

Answer: C — The excess return above the return predicted by CAPM given the portfolio's beta

A) Total, not excess. B) Standard deviation. C) Correct — Jensen's alpha. D) Correlation, not alpha.

Which of the following is LEAST relevant to a customer-specific suitability determination for a proposed recommendation?

1. The customer's investment time horizon and stated liquidity needs
2. The customer's tax status and existing investment portfolio holdings
3. The name of the sales assistant who processed the new account paperwork
4. The customer's risk tolerance and overall investment experience level

Answer: C — The name of the sales assistant who processed the new account paperwork

A) Highly relevant to suitability. B) Highly relevant to suitability. C) Correct — clerical processing details are irrelevant to the suitability analysis. D) Highly relevant to suitability.

When a client's documented risk tolerance materially changes, such as after a major life event, the adviser's FIRST obligation is generally to:

1. Immediately liquidate the entire portfolio pending a new client agreement
2. Ignore the change until the next scheduled annual review meeting occurs
3. Update the client's profile and reassess whether the current allocation remains suitable
4. Transfer the account to a different adviser better suited to the new profile

Answer: C — Update the client's profile and reassess whether the current allocation remains suitable

A) Immediate full liquidation is an overreaction. B) Delaying could leave an unsuitable allocation in place. C) Correct — update the profile and reassess suitability promptly. D) Reassignment isn't the required first step.

Dollar-cost averaging as an investment technique typically results in:

1. A guaranteed positive return over the investment period regardless of market direction
2. Elimination of market risk for the investor over any measured investment horizon
3. A lower average cost per share than the average of the prices paid over the period
4. A higher average cost per share than the average of the prices paid over the period

Answer: C — A lower average cost per share than the average of the prices paid over the period

A) No guarantee. B) Doesn't eliminate market risk. C) Correct — fixed-dollar buying results in avg cost < avg price. D) Reverses.

A Transfer on Death (TOD) designation on a brokerage account primarily allows the account owner to:

1. Avoid probate by passing the account directly to a named beneficiary at death
2. Eliminate all capital gains tax liability on the account's appreciated securities
3. Grant the named beneficiary immediate trading authority during the owner's lifetime
4. Convert the account automatically into a trust upon the owner's death

Answer: A — Avoid probate by passing the account directly to a named beneficiary at death

A) Correct — TOD passes assets outside probate directly to the named beneficiary. B) TOD doesn't eliminate capital gains tax exposure. C) TOD beneficiaries have no rights during the owner's lifetime. D) TOD doesn't create a trust.

The Information Ratio measures which of the following characteristics of active management?

1. Excess return over the risk-free rate divided by the portfolio's systematic beta measure
2. Excess return over the risk-free rate divided by the portfolio's total standard deviation
3. Excess return over the benchmark divided by the tracking error of the portfolio
4. Absolute portfolio return divided by the standard deviation of the benchmark's returns

Answer: C — Excess return over the benchmark divided by the tracking error of the portfolio

A) Treynor. B) Sharpe. C) Correct. D) Not a standard metric.

Converting funds from a Traditional IRA to a Roth IRA results in which immediate federal tax consequence?

1. No tax consequence because conversions occur entirely within retirement accounts
2. A 10% early withdrawal penalty regardless of the account owner's age
3. The converted amount is included in taxable ordinary income for that year
4. The converted amount is taxed at long-term capital gains rates only

Answer: C — The converted amount is included in taxable ordinary income for that year

A) Conversions are a taxable event despite staying within retirement accounts. B) The 10% penalty generally doesn't apply to a direct conversion. C) Correct — the converted pre-tax amount becomes ordinary taxable income. D) Conversions are taxed as ordinary income, not capital gains.

The Treynor ratio is MOST appropriate for evaluating which type of portfolio?

1. A concentrated, undiversified portfolio where total risk is the primary concern
2. A portfolio consisting entirely of Treasury bills with no market exposure
3. A well-diversified portfolio where unsystematic risk has largely been eliminated
4. Any portfolio regardless of its diversification level or risk composition

Answer: C — A well-diversified portfolio where unsystematic risk has largely been eliminated

A) An undiversified portfolio still carries unsystematic risk; Sharpe is more appropriate there. C) Correct — Treynor uses beta, appropriate once diversification removes unsystematic risk. B) T-bills have no beta exposure to evaluate. D) The ratio's validity depends on the portfolio's diversification level.

What is the annual gift tax exclusion?

The amount a donor can give to any number of recipients each year without filing a gift tax return or reducing the donor's lifetime estate/gift tax exemption. Indexed for inflation.

What is the kiddie tax?

Unearned income above a threshold ($2,500 in 2024) of a child under 19 (24 if full-time student) is taxed at parents' marginal rates.

What are qualified dividends?

Dividends from US (and qualified foreign) corporations meeting holding-period requirements. Taxed at LTCG rates rather than ordinary income.

How should an IAR address a client's behavioral biases?

Educate, set rules-based decision processes (IPS, rebalancing), use checklists, automate behaviors, document objectives. Reduce reactive emotional decisions.