Series 65 – Uniform Investment Adviser Law Exam Client Investment Recommendations and Strategies 2 — Questions and Answers
Question 1: What is the fiduciary duty of an investment adviser?
- To recommend only the most expensive financial products
- To act in the best interest of the client and put the client's interests ahead of their own (Correct answer)
- To generate the highest commissions possible
- To recommend only government-approved securities
Correct answer: To act in the best interest of the client and put the client's interests ahead of their own
Investment advisers registered under the Investment Advisers Act owe a fiduciary duty to clients, requiring them to act in the client's best interest at all times.
Question 2: Which of the following is a characteristic of a tax-deferred retirement account?
- Contributions are made with after-tax dollars and withdrawals are tax-free
- Contributions reduce current taxable income and withdrawals are taxed as ordinary income (Correct answer)
- All investment gains are permanently tax-exempt
- There is no limit on annual contributions
Correct answer: Contributions reduce current taxable income and withdrawals are taxed as ordinary income
In tax-deferred accounts like traditional IRAs and 401(k)s, contributions may reduce current taxable income, and withdrawals in retirement are taxed as ordinary income.
Question 3: What is a Roth IRA's primary tax advantage?
- Contributions are tax-deductible in the year made
- Qualified withdrawals in retirement are tax-free (Correct answer)
- There are no contribution limits
- Required minimum distributions begin at age 59½
Correct answer: Qualified withdrawals in retirement are tax-free
Roth IRA contributions are made with after-tax dollars, but qualified withdrawals — including earnings — are completely tax-free in retirement.
Question 4: What is systematic risk?
- Risk specific to a single company that can be eliminated through diversification
- Market-wide risk that cannot be eliminated through diversification (Correct answer)
- The risk of a mutual fund underperforming its benchmark
- Credit risk associated with bond issuers
Correct answer: Market-wide risk that cannot be eliminated through diversification
Systematic risk (also called market risk) affects the entire market or broad economy and cannot be reduced by diversifying within that market.
Question 5: What does a passive investment strategy seek to do?
- Outperform the market through active security selection
- Replicate the performance of a market index with minimal trading and low costs (Correct answer)
- Use leverage to amplify market returns
- Identify and invest in undervalued securities
Correct answer: Replicate the performance of a market index with minimal trading and low costs
Passive investing aims to replicate an index's returns through minimal trading, reducing costs and avoiding the risks associated with active management.
Question 6: Which of the following best describes a wrap fee account?
- An account that charges a fee for each transaction executed
- An account that bundles advisory, brokerage, and custodial services into a single annual fee based on assets under management (Correct answer)
- A savings account with a guaranteed wrap-around interest rate
- An account designed exclusively for tax-exempt investors
Correct answer: An account that bundles advisory, brokerage, and custodial services into a single annual fee based on assets under management
Wrap fee accounts charge a single all-inclusive annual fee (typically a percentage of AUM) that covers advisory services, brokerage commissions, and custodial costs.
Series 65 – Uniform Investment Adviser Law Exam Client Investment Recommendations and Strategies 2
What is the fiduciary duty of an investment adviser?