Question

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 Brown’s estimated net worth is $3 million. The majority of their financial wealth is allocated among Individual Retirement Accounts, Tom’s 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

Answer 1

Question 1: Option E.

All the mentioned forms of payment are considered as compensation by the SEC

Question 2: Option C

Investment advisors can register with the SEC if they have greater than $100 million as Assets Under Management (AUM).