NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesEasy
A client, aged 45, is evaluating several investment options for their retirement portfolio. They are particularly interested in an investment vehicle that offers professional management, diversification across various asset classes, and the ability to set a specific target retirement date, with the asset allocation automatically adjusting to become more conservative as that date approaches. Which of the following investment vehicles best suits this client's needs?
- AA diversified portfolio of individual stocks and bonds
- BA target-date fund
- CA sector-specific exchange-traded fund (ETF)
- DA money market mutual fund
Show answer & explanationAnswer & explanation
Correct answer: B. A target-date fund
Target-date funds are specifically designed to meet the needs of investors planning for retirement by automatically adjusting their asset allocation to become more conservative as the target date approaches, providing professional management and diversification.
Why the other options are wrong
- A. While offering diversification, this option requires active management by the client or an advisor and does not automatically adjust its asset allocation over time.
- C. Sector-specific ETFs offer diversification within a particular industry but lack broad asset class diversification and automatic rebalancing for retirement planning.
- D. Money market funds are extremely conservative, offering little growth potential, and are not suitable for long-term retirement planning.
Target-Date Fund
A mutual fund that automatically adjusts its asset allocation over time, becoming more conservative as the investor's target retirement date approaches.
- Professional management
- Diversification across asset classes
- Automatic 'glide path' adjustment of asset allocation
- Designed for retirement planning
Memory trick: Retirement's date, the fund dictates, adjusting its weight, for your golden gate.