Series 7 Guru: Suitability and Investment Objectives

Introduction

• Discussion on suitability, focusing on investment objectives and goals.
• Emphasis on understanding investment vehicles to better answer suitability questions.

Preservation of Capital

• Investment Options: Money Market Securities, Government Securities
  • Money Market Securities: Suitable for short time horizons; includes treasury bills, commercial paper, and bankers' acceptances.
  • Government Securities: T-bills, T-notes, T-bonds, and tips, backed by government credit.
• Unsuitable: Equities and Direct Participation Programs (DPPs) due to higher risk.

Current Income

• Suitable Investments: Government Bonds, Municipal Bonds, Corporate Bonds, Preferred Stocks
  • Pay interest semi-annually.
  • Utility stocks are stable and pay dividends.
• Risk: Fixed income securities are subject to interest rate and inflation risks.

Capital Growth

• Suitable Investments: Common Stock for price appreciation and inflation hedging.
• Unsuitable: Debt securities, as they are more about maintaining wealth rather than growing it.

Tax-Advantaged Investments

• Examples: IRAs and Annuities
  • Tax-deferred growth; IRAs reduce taxable income.
  • Municipal Bonds: Pay tax-free interest.

Diversification

• Reduces non-systematic risk.
• Mutual funds offer professional management and diversification.

Inflation and Purchasing Power Risk

• Suitable Investments: Common stocks, Variable annuities
• Unsuitable: Fixed annuities due to inflation risk.

Liquidity

• Liquid Investments: Money market funds, listed securities, mutual funds.
• Illiquid Investments: DPPs, thinly traded securities, penny stocks.

Speculation

• Speculative Strategies: Buying and selling options (calls, puts), Straddles, High yield bonds
• Risks: Requires predicting market direction, volatility, and timing.

Leverage

• Leverage Instruments: Margin accounts, Options
  • Margin accounts require Hypothecation and Credit Agreements.
  • Options require additional documentation due to increased risk.

Suitability and Risk Tolerance

• Considerations include age, marital status, financial and non-financial considerations.
• Importance of risk tolerance in investment decisions.

Other Risks

• Inflation Risk: Measured by CPI; affects bonds and fixed annuities.
• Interest Rate Risk: Affects long-term bonds; zero-coupon bonds avoid reinvestment risk.
• Credit Risk: Risk of issuer default.
• Legislative Risk: Changes in laws that can impact investment value.

Conclusion

• The lecture provided a comprehensive overview of suitability and how to match investment vehicles to client needs.
• A reminder that understanding these concepts is critical for the Series 7 exam.

These notes summarize key points from a lecture on investment suitability and objectives, aimed at helping Series 7 test takers understand and answer questions related to suitability.