Customer Accounts & Suitability Flashcards

What is the main difference between a Roth IRA and a Traditional IRA?

Answer: Roth IRA contributions are made with after-tax dollars and qualified withdrawals are tax-free; Traditional IRA contributions may be pre-tax but withdrawals are taxed

Roth IRA contributions are made with after-tax money so qualified withdrawals in retirement are completely tax-free; Traditional IRA contributions may be tax-deductible but withdrawals are taxed as ordinary income.

What is a 401(k) plan and who is eligible to contribute?

Answer: An employer-sponsored defined contribution retirement plan for eligible employees to contribute pre-tax dollars

A 401(k) is an employer-sponsored defined contribution retirement plan allowing eligible employees to contribute pre-tax dollars from their salary, with many employers matching a portion of contributions.

What does 'suitability' mean when a broker recommends an investment product?

Answer: The recommendation must align with the customer's investment profile, including risk tolerance, time horizon, and financial situation

Suitability requires that a broker's recommendation be appropriate for the specific customer based on their financial situation, investment objectives, risk tolerance, experience, time horizon, and other relevant factors.

Which document must a customer sign before trading options in their brokerage account?

Answer: An options agreement and receive the Options Disclosure Document (ODD)

Before approving options trading, broker-dealers must have the customer sign an options agreement, and they must provide the Options Disclosure Document (ODD) titled 'Characteristics and Risks of Standardized Options.'

What is a 'fee-based account' versus a 'commission-based account'?

Answer: Fee-based charges a flat annual percentage of assets under management; commission-based charges per transaction

Fee-based accounts charge an annual fee as a percentage of assets under management (AUM) regardless of trading activity, while commission-based accounts charge a fee for each transaction executed.

Under what circumstances can a broker-dealer share in the profits and losses of a customer's account?

Answer: Only with written authorization from the customer and FINRA permission, and only if the broker contributes proportionate capital

A registered representative may only share in the profits and losses of a customer's account with written customer authorization and the firm's approval, and must contribute capital in proportion to the share of profits/losses they receive.