FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationOpening and Maintaining Customer Accounts and Investment RecommendationsHard
A 70-year-old client with a moderate risk tolerance and a desire for consistent income is considering an investment. They have a significant portion of their portfolio in equities and are looking to diversify. Which of the following investments would generally be LEAST suitable for this client?
- AA non-traded real estate investment trust (REIT).
- BA diversified portfolio of investment-grade municipal bonds.
- CA variable annuity with a guaranteed lifetime withdrawal benefit (GLWB) rider.
- DA balanced mutual fund with a mix of stocks and bonds.
Show answer & explanationAnswer & explanation
Correct answer: A. A non-traded real estate investment trust (REIT).
Non-traded REITs are generally illiquid, carry higher fees, and often have significant valuation uncertainty, making them less suitable for a 70-year-old client seeking consistent income and moderate risk. While variable annuities have complexities, a GLWB rider can provide guaranteed income. Municipal bonds and balanced funds align better with income and diversification goals.
Why the other options are wrong
- B. Municipal bonds provide tax-exempt income and can be suitable for income-seeking clients with moderate risk.
- C. A variable annuity with a GLWB rider can provide a guaranteed income stream, addressing the client's desire for consistent income, despite other complexities.
- D. Balanced funds offer diversification and a mix of income and growth, aligning with moderate risk and income goals.
Non-Traded REIT Suitability
Non-traded Real Estate Investment Trusts (REITs) are direct investments in real estate portfolios that are not listed on public exchanges, making them illiquid.
- Lack of liquidity: Investors cannot easily sell shares.
- High fees and commissions, which can erode returns.
- Valuation uncertainty: Share price is not determined by daily market forces.
- Generally considered suitable only for sophisticated investors with long-term horizons and high-risk tolerance.
Memory trick: Age, risk, goals, and liquidity – all must fit perfectly.