FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationOpening and Maintaining Customer Accounts and Investment RecommendationsHard
A client inherits a substantial sum and wants to invest it for their grandchild's college education, which is still 15 years away. The client expresses a desire for growth but is very risk-averse, stating, 'I cannot afford to lose any of this money.' Which of the following investment strategies would be most suitable?
- AA 529 plan with an age-based allocation, primarily in conservative investments.
- BInvesting solely in a money market fund for the entire 15-year period.
- CA portfolio heavily weighted in aggressive growth stocks and sector funds.
- DA variable annuity with a principal protection rider and a short-term income payout.
Show answer & explanationAnswer & explanation
Correct answer: A. A 529 plan with an age-based allocation, primarily in conservative investments.
A 529 plan is specifically designed for college savings, offering tax benefits. An age-based allocation automatically becomes more conservative as the beneficiary approaches college age, aligning with the long-term goal and the client's risk aversion while still aiming for growth. The 'primarily in conservative investments' aspect addresses the 'cannot afford to lose any money' concern within the 529 structure.
Why the other options are wrong
- B. Investing solely in a money market fund for 15 years would likely not keep pace with inflation or achieve the necessary growth for college expenses, despite being very safe.
- C. Aggressive growth stocks and sector funds are too risky for a very risk-averse client who 'cannot afford to lose any money,' despite the long time horizon.
- D. A variable annuity, even with principal protection, is generally more complex and costly than a 529 plan for college savings, and a 'short-term income payout' contradicts the 15-year growth horizon.
529 Plan Suitability
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs, offering various investment options.
- Tax-deferred growth and tax-free withdrawals for qualified education expenses.
- Investment options often include age-based or static portfolios.
- Suitable for long-term college savings goals.
Memory trick: For college, 529 is the wise plan, especially with age-based safety.