CIC Assessing Client Investment Goals 3 — Questions and Answers
Question 1: Which of the following is a CONSTRAINT rather than an investment objective when defining client goals?
- Liquidity requirements (Correct answer)
- Total return target
- Capital appreciation goal
- Income generation need
Correct answer: Liquidity requirements
Liquidity requirements constrain how a portfolio is managed; return, appreciation, and income are objectives.
Question 2: A client's marginal tax rate is 37%. Which account type should hold high-yield bonds to optimize after-tax returns?
- Tax-deferred account (IRA/401k) (Correct answer)
- Taxable brokerage account
- Roth IRA
- 529 college savings plan
Correct answer: Tax-deferred account (IRA/401k)
High-yield bonds generate ordinary income taxed at 37%; sheltering them in a tax-deferred account eliminates current-year tax drag.
Question 3: When a client says her goal is to 'grow wealth,' what is the counselor's most important next step?
- Quantify the goal with specific dollar amounts, time frames, and required return (Correct answer)
- Immediately recommend a diversified equity portfolio
- Ask if she prefers growth or value stocks
- Document 'growth' as the official objective in the IPS
Correct answer: Quantify the goal with specific dollar amounts, time frames, and required return
Vague goals must be translated into specific, measurable targets before an appropriate strategy can be designed.
Question 4: A couple plans to fund their child's college education starting in 8 years. This goal is best characterized as:
- Specific, time-bound, and capital-certain at a defined future date (Correct answer)
- Long-term with high equity risk appropriate throughout
- An indefinite liability with no funding deadline
- A secondary goal that requires no dedicated allocation
Correct answer: Specific, time-bound, and capital-certain at a defined future date
Education funding has a hard deadline with known costs, making it a defined-date liability requiring capital certainty by year 8.
Question 5: Which risk assessment approach examines how a client historically reacted during past market downturns?
- Behavioral risk profiling (Correct answer)
- Monte Carlo simulation
- Mean-variance optimization
- Scenario stress testing
Correct answer: Behavioral risk profiling
Behavioral risk profiling uses actual past behavior — panic selling, holding, or buying the dip — to gauge true risk tolerance.
Question 6: A client with a $2M portfolio wants to leave at least $500,000 to heirs while maintaining his lifestyle. This $500,000 represents a:
- Floor constraint on terminal wealth (Correct answer)
- Return objective
- Liquidity reserve
- Short-term capital gain
Correct answer: Floor constraint on terminal wealth
A minimum bequest requirement establishes a floor on terminal wealth that constrains portfolio risk-taking.
Question 7: Which scenario best illustrates a mismatch between stated and revealed risk preference?
- Client says aggressive growth is fine but moved to 100% cash during a 10% correction (Correct answer)
- Client requests bonds and keeps them through a bear market
- Client selects a balanced fund and stays invested through volatility
- Client updates her IPS after a significant life change
Correct answer: Client says aggressive growth is fine but moved to 100% cash during a 10% correction
Fleeing to cash during a minor correction reveals that actual risk tolerance is far lower than the client's stated preference.
CIC Assessing Client Investment Goals 3
Which of the following is a CONSTRAINT rather than an investment objective when defining client goals?