FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client in a high tax bracket seeking current income and willing to accept illiquidity is evaluating an equipment leasing direct participation program. The MOST significant suitability concern for a representative to consider before recommending this DPP is:
- AEquipment leasing programs offer no potential for income distributions
- BEquipment leasing programs carry equipment obsolescence and residual value risk that can affect returns
- CThe client's investment is fully liquid and can be sold immediately if needed
- DEquipment leasing programs are only suitable for clients seeking long-term capital appreciation
Show answer & explanationAnswer & explanation
Correct answer: B. Equipment leasing programs carry equipment obsolescence and residual value risk that can affect returns
Equipment leasing DPPs generate income from leasing payments, but a major risk is that the leased equipment may become obsolete or have a lower-than-expected residual value at the end of the lease term, reducing overall program returns.
Why the other options are wrong
- A. Equipment leasing programs are specifically designed to generate income distributions from lease payments.
- C. DPPs, including equipment leasing programs, are illiquid with no active secondary market.
- D. These programs are generally suited for income, not primarily for capital appreciation.
Equipment Leasing DPP Risk
Equipment leasing direct participation programs generate income from lease payments but carry the risk that equipment may become obsolete or have lower residual value than projected.
- Income generated from lease payments on equipment
- Key risk: obsolescence and residual value uncertainty
- Illiquid investment appropriate for income-seeking, risk-tolerant investors
Memory trick: 'Leased equipment ages — yesterday's crane is tomorrow's scrap.'