IAR Client Investment Recommendations & Strategies 5

Question 1

A client asks an IAR to recommend an ESG (Environmental, Social, Governance) portfolio. The IAR's primary duty is to:

Accepted Answer

Evaluate ESG options and select those that align with the client's financial objectives and values

Answer

An IAR can incorporate ESG criteria while still meeting fiduciary obligations by selecting options that serve both the client's financial objectives and expressed values.

Question 2

Which metric best helps an IAR assess whether a portfolio's excess return is justified by the risk taken?

Accepted Answer

Sharpe ratio

Answer

The Sharpe ratio measures risk-adjusted return by dividing excess return over the risk-free rate by the portfolio's standard deviation.

Question 3

When recommending a variable annuity to a client, which disclosure is most critical from a suitability perspective?

Accepted Answer

Surrender charges, fees, and the impact on liquidity over the surrender period

Answer

Variable annuities often carry significant surrender charges lasting 7–10 years, making liquidity disclosure essential to assessing whether the product suits the client's needs.

Question 4

A client nearing retirement has a large unrealized gain in a single stock inherited years ago. An IAR recommending diversification should consider:

Accepted Answer

Tax consequences of the sale alongside concentration and sequence-of-return risks

Answer

Diversification is appropriate, but the IAR must weigh embedded capital gains taxes, the cost of concentration risk, and potential strategies like tax-loss harvesting or charitable giving before recommending action.

Question 5

Which of the following best describes the role of rebalancing in portfolio management?

Accepted Answer

Restoring the portfolio to its target allocation by trimming outperformers and adding to underperformers

Answer

Rebalancing maintains the portfolio's intended risk profile by periodically selling assets that have grown above target weights and buying those that have fallen below.

IAR Practice Test

IAR Practice Test

IAR Client Investment Recommendations & Strategies 5