FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationOpening and Maintaining Customer Accounts and Investment RecommendationsMedium
A client, age 70, is retired and relies on their investment portfolio for current income. They expect moderate income with minimal capital risk and have a low-to-moderate risk tolerance. Which of the following investment strategies would be most appropriate?
- AA portfolio heavily weighted towards high-yield corporate bonds.
- BA diversified portfolio primarily invested in blue-chip dividend stocks and investment-grade corporate bonds.
- CA variable annuity with an equity-focused subaccount allocation.
- DA portfolio focused on aggressive growth stocks and emerging market funds.
Show answer & explanationAnswer & explanation
Correct answer: B. A diversified portfolio primarily invested in blue-chip dividend stocks and investment-grade corporate bonds.
For a retired client seeking current income with minimal capital risk and a low-to-moderate risk tolerance, a diversified portfolio of blue-chip dividend stocks and investment-grade corporate bonds provides a balance of income and relative safety. High-yield bonds, aggressive growth stocks, and variable annuities with aggressive subaccounts are too risky.
Why the other options are wrong
- A. High-yield (junk) bonds carry significant credit risk, making them unsuitable for a client seeking minimal capital risk.
- C. Variable annuities are long-term products, and equity-focused subaccounts are too risky for this income-focused, low-to-moderate risk client.
- D. Aggressive growth stocks and emerging market funds are highly volatile and unsuitable for a low-to-moderate risk tolerance.
Income-Oriented Asset Allocation (Moderate Conservative)
For retired clients needing current income with low-to-moderate risk, a portfolio emphasizing dividend stocks and investment-grade bonds is suitable.
- Primary objective: Current income.
- Risk tolerance: Low to moderate.
- Focus on stable income-producing assets.
- Avoid high-risk, high-volatility investments.
Memory trick: Retired income needs Blue-Chip dividends and Investment-Grade bonds for safety.