Background

Tom and Sharon Brown are not happy with their current investment advisor. They are seeking investment management and financial advisory services from someone they can trust. You are a registered investment advisor in your home state of Kansas. You have been in business for seven years and work with a select group of 70 clients. You offer financial and investment planning advice for either a percentage of assets under management or hourly fees. During the initial meeting with the Browns, you gather the following financial information:

Personal Data & Background Information

Primary Contact: Tom Brown Age: 53 Occupation/Title: Operations Management / VP of Operations

Secondary Contact: Sharon Brown Age: 56 Occupation: Home Maker

Children: Tom does not have any children of his own. Sharon has three children in college from her previous marriage; Maggie, 18; Shelby, 20; Candy, 22.

Marital Status: Comfortably married for eight years.

Relevant Financial Information

The Browns estimated net worth is $3 million. The majority of their financial wealth is allocated among Individual Retirement Accounts, Toms 401(k) plan, and a taxable investment account.

Sharon was widowed in her first marriage and the majority of the savings in the taxable account is life insurance proceeds. The account is a joint account and Sharon hopes to use a portion of the savings to help her girls purchase their first home. They have a 529 plan for college expenses.

Tom has an above average risk tolerance and Sharon leans more toward conservative, low risk investments.

Financial Objectives

Seek and find a reputable, ethical investment advisor to aid in their wealth accumulation and financial development.

Both have had undesirable experiences in the past working with other financial planning professionals and seek to understand the regulatory and ethical requirements for financial planners.

Work with an advisor to help them agree on an investment strategy to preserve their savings for future retirement.

1. In your first meeting with Tom and Sharon, they are very inquisitive about the compensation of investment advisors. According to the SEC, which of the following are considered forms of compensation?

a) Receipt of any economic benefit

b) Single fee charged for advice given on financial outlook

c) Commission paid on sale of investment and/or insurance product

d) Hourly fee charged reporting and analyzing financial situation

e) All of the above

2. Tom and Sharon are ready to engage your financial planning services; however, they have one concern. Tom is concerned that you are not properly qualified to manage his assets because you are not registered with the SEC. What is your best response?

a) The individual state securities departments collectively assist in the management of the SEC. Therefore SEC regulation is neither permitted nor required if an investment advisor is registered with his or her state.

b) Registering as an investment advisor in your state is the same as registering with the SEC because many state investment advisor regulations are patterned after the federal Investment Advisor Act of 1940.

c) Investment advisors with less than $25 million of assets under management are generally prohibited from registering with the SEC.

d) Investment advisors with less than 100 clients are generally prohibited from registering with the SEC.

e) All of the above

3. Tom and Sharon have asked you to manage and take custody of their investment accounts. You:

a) Agree to their request because they have over $1 million in assets; the minimum limit required by law.

b) Disagree because they don't have over the $5 million in assets; minimum limit required by law.

c) Agree, and begin to transfer the funds, immediately disclosing the holding location.

d) Disagree, because investment advisors are not allowed to take custody of their client's investment accounts.

4. Tom and Sharon have asked you to make investment recommendations for their Individual Retirement Accounts. They have agreed to moderate risk, conservative investments that keep up with inflation. Which of the following are suitable recommendations?

I. Municipal Bonds

II. Mutual Funds

III. Corporate Bonds

IV. Stocks

a) IV only

b) I and II

c) I, III, and IV

d) II, III and IV

e) All four are suitable recommendations.

5. You presented an investment policy for Tom and Sharon's accounts. However, Tom insists that you continue his current method of investing. One year later, they realized a 22 percent loss in their accounts. You should:

a) Suggest that Tom and Sharon find a new investment advisor

b) Communicate that you are acting only in the direction given by them

c) Refund a portion of your fee to compensate for the loss

d) Split the total loss with Tom and Sharon

6. Tom requests you place a trade to buy 2,000 shares of XYZ stock in his account that he has been researching on his own. A month later, after researching the stock yourself, you decide that it would be a great investment for your personal finances. You purchase 5,000 shares and disclose the purchase to Tom. Is this ethical?

a) Yes. It is permissible to place an order in your personal financial account at the same time and/or after the purchase was placed for your client.

b) Yes. You are protected by the fifteen day waiting period requirement to purchase the same stock as your client.

c) No, because your purchase might make the stock price rise and your client will have a personal gain.

d) No, because you are not allowed to use advice on investment purchases from your clients for personal reasons.

7. Yesterday, Tom was golfing with his best friend, Phil, who is the CEO of ABC company. In conversation, Tom learns that Phil will be announcing next week that ABC company fourth quarter revenue significantly exceeded projections. Tom tells you about the conversation and instructs you to purchase 2,000 shares of the stock. What should you do?

a) Purchase the stock as instructed by your client.

b) Refuse to purchase the stock and request that Tom no longer engage your services.

c) Ask Tom to put the request in writing, and then you will place the trade.

d) Advise Tom to purchase the stock at a later date after the announcement has been made public.

8. Sharon's youngest daughter, Maggie calls you directly. She informs you that Sharon requested she call and obtain the balance of the 529 plan that Sharon uses to pay her yearly education expenses. You should:

a) Suggest that the Browns set up a meeting in your office to go over the account with Maggie.

b) Disclose the information over the phone because you represent Tom, Sharon, and their children as clients.

c) Give Maggie the online account password to check the balance herself.

d) Request permission directly from Sharon to discuss the account with Maggie.

9. As an investment advisor, you are required by the Investment Advisor Act of 1940 to provide the Browns with information regarding the background and practices of your business. How often are you required to deliver this information?

a) Only once at the beginning of the advisory relationship.

b) At the beginning of the relationship, and semi-annually there after.

c) At the beginning of the relationship, and annually there after.

d) At the beginning of the relationship, and every time you make an update.

10. Sharon, whom you never spoke with following the first client meeting (Tom handles all the financial affairs), calls to inform you that she is filing for divorce. She has asked you to notify her if Tom requests to withdraw funds from the jointly held taxable account. You:

a) Explain to Sharon that you represent Tom because he is the primary contact on the accounts

b) Suggest to Sharon that she open a new account and transfer half the account balances

c) Put a "hold" on the accounts to prevent future withdrawals from either party

d) Follow the requests made by Sharon within the limits of joint account ownership