FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationOpening and Maintaining Customer Accounts and Investment RecommendationsMedium
A client, age 45, is seeking an investment that provides tax-deferred growth and supplemental retirement income, but is concerned about market volatility. They have a moderate risk tolerance and a long-term investment horizon. Which of the following would be MOST suitable for this client?
- AAn equity income fund.
- BA mutual fund investing in high-yield corporate bonds.
- CA variable annuity.
- DA fixed annuity.
Show answer & explanationAnswer & explanation
Correct answer: C. A variable annuity.
A variable annuity offers tax-deferred growth and can provide supplemental retirement income. While subject to market volatility, it allows for investment in subaccounts aligned with a moderate risk tolerance. Fixed annuities offer guaranteed returns but no growth potential beyond that. High-yield bonds and equity income funds lack the tax-deferred growth and guaranteed income options of annuities.
Why the other options are wrong
- A. An equity income fund focuses on current dividends and growth, but lacks the tax-deferred growth and potential income guarantees of an annuity.
- B. High-yield corporate bonds carry higher risk and do not offer tax-deferred growth like an annuity.
- D. A fixed annuity provides guaranteed income but no market-driven growth potential, which may not fully meet the client's growth desire for a long-term horizon.
Variable Annuity Suitability (Deferred)
A contract with an insurance company designed for long-term savings, offering tax-deferred growth and a stream of income in retirement. Investment performance varies based on underlying subaccounts.
- Suitable for investors with a long-term horizon seeking tax-deferred growth.
- Offers a death benefit and optional riders for guaranteed income.
- Involves investment risk as subaccount performance is not guaranteed.
- Often includes surrender charges and various fees.
Memory trick: Annuities defer taxes, funds grow, bonds provide income, each has its flow.