IAR Client Investment Recommendations & Strategies 2 — Questions and Answers
Question 1: A 58-year-old client with a moderate risk tolerance wants to retire in 7 years. Which portfolio allocation is most appropriate?
- 100% equities for maximum growth
- 60% equities, 40% fixed income with gradual de-risking (Correct answer)
- 100% bonds to eliminate market risk
- 50% cash, 50% speculative growth stocks
Correct answer: 60% equities, 40% fixed income with gradual de-risking
A balanced 60/40 portfolio with a glide path toward less equity exposure aligns with a moderate-risk, near-retirement investor's goals.
Question 2: When evaluating suitability for options trading, an IAR must primarily consider which factor?
- The client's interest in complex products
- The client's financial sophistication and risk capacity (Correct answer)
- The commissions generated by options trades
- Whether the broker-dealer offers options products
Correct answer: The client's financial sophistication and risk capacity
Options are complex, leveraged instruments, so the client's ability to understand and financially absorb losses is the primary suitability concern.
Question 3: A client asks an IAR to recommend a strategy that generates regular income while limiting downside risk. Which strategy best fits?
- Concentrated position in a single growth stock
- Covered call writing on existing stock holdings (Correct answer)
- Purchasing out-of-the-money call options
- Leveraged ETF buy-and-hold strategy
Correct answer: Covered call writing on existing stock holdings
Covered calls generate premium income and provide partial downside offset, making them suitable for income-seeking clients with existing equity positions.
Question 4: Which of the following best describes dollar-cost averaging as an investment strategy?
- Investing a lump sum when prices are at a 52-week low
- Investing a fixed dollar amount at regular intervals regardless of price (Correct answer)
- Rebalancing the portfolio to fixed weights monthly
- Selling losing positions and buying winners each quarter
Correct answer: Investing a fixed dollar amount at regular intervals regardless of price
Dollar-cost averaging involves investing a fixed amount at set intervals, which reduces the impact of volatility by purchasing more shares when prices are low.
Question 5: A client has a very high risk tolerance but a short 2-year time horizon. How should an IAR handle this conflict?
- Honor the stated risk tolerance and allocate 100% to equities
- Prioritize the short time horizon and recommend lower-volatility assets (Correct answer)
- Refuse to manage the account due to conflicting parameters
- Let the client decide without offering guidance
Correct answer: Prioritize the short time horizon and recommend lower-volatility assets
When risk tolerance and time horizon conflict, the shorter time horizon typically takes precedence because volatility can cause permanent loss before recovery is possible.
Question 6: An IAR recommends a municipal bond fund to a high-income client in the 37% federal tax bracket. What is the primary justification?
- Municipal bonds have higher pre-tax yields than corporate bonds
- Tax-exempt interest income increases after-tax returns for high-bracket investors (Correct answer)
- Municipal bonds are guaranteed by the federal government
- The fund's expense ratio is lower than equity funds
Correct answer: Tax-exempt interest income increases after-tax returns for high-bracket investors
High-income investors benefit most from tax-exempt municipal bond interest because their marginal tax rate makes the tax equivalent yield highly attractive.
Question 7: Which of the following investment policy statement (IPS) components directly governs how the IAR may alter the portfolio without additional client approval?
- Return objectives section
- Rebalancing and discretionary authority guidelines (Correct answer)
- Risk tolerance questionnaire responses
- Biographical client information
Correct answer: Rebalancing and discretionary authority guidelines
The rebalancing and discretionary authority guidelines in an IPS define the parameters within which an IAR may act without seeking separate client approval for each trade.
IAR Client Investment Recommendations & Strategies 2
A 58-year-old client with a moderate risk tolerance wants to retire in 7 years.
Which portfolio allocation is most appropriate?