FINRA Series 7Opens Accounts and Evaluates Customer ProfileHard
A customer's account profile shows a total net worth of $600,000, consisting of $250,000 in home equity, $100,000 in a 401(k) retirement account, and $250,000 in a taxable brokerage account holding stocks and cash. The customer has no outstanding liabilities. For suitability purposes when evaluating an illiquid investment recommendation, what is the customer's approximate liquid net worth?
- A$100,000
- B$350,000
- C$250,000
- D$600,000
Show answer & explanationAnswer & explanation
Correct answer: C. $250,000
Liquid net worth includes only assets readily convertible to cash without substantial loss of value or penalty, generally excluding home equity and tax-advantaged retirement accounts subject to withdrawal penalties. Here, only the $250,000 taxable brokerage account qualifies, making liquid net worth approximately $250,000.
Why the other options are wrong
- A. This isolates only the retirement account, which is actually the illiquid asset that should be excluded.
- B. This figure incorrectly combines the retirement account with the brokerage account.
- D. This is total net worth, not liquid net worth; it improperly includes illiquid assets.
Liquid Net Worth
The portion of a customer's net worth held in assets that can be converted to cash quickly without significant loss of value or penalty, used to assess suitability of illiquid investments.
- Excludes home equity and primary residence value
- Excludes retirement accounts due to withdrawal penalties/taxes
- Important for suitability of DPPs, non-traded REITs, and other illiquid products
Memory trick: Only cash-like assets count — house and 401(k) stay locked out.