NASAA Series 65, Uniform Investment Adviser Law ExaminationInvestment Vehicle CharacteristicsEasy
A client, a recent retiree, is seeking an investment that provides a guaranteed income stream for a specified period, regardless of their lifespan, to cover essential living expenses. They are risk-averse and prioritize predictability over growth potential. Which of the following investment vehicles would be most suitable for this client?
- AFixed-Period Annuity
- BCommodity Futures Contract
- CEquity Mutual Fund
- DVariable Annuity
Show answer & explanationAnswer & explanation
Correct answer: A. Fixed-Period Annuity
A fixed-period annuity provides a guaranteed income stream for a specific number of years, making it suitable for a risk-averse retiree needing predictable income for essential expenses.
Why the other options are wrong
- B. Commodity futures contracts are highly speculative and carry significant risk, completely contrary to the client's stated risk aversion and need for guaranteed income.
- C. An equity mutual fund is subject to market fluctuations and does not guarantee income, making it unsuitable for a risk-averse client prioritizing predictability.
- D. A variable annuity has investment risk and fluctuating income, which doesn't align with the client's risk aversion and need for predictability.
Fixed-Period Annuity
An insurance product that provides guaranteed income payments for a predetermined number of years, offering predictability and safety.
- Guaranteed income for a specific period
- Suitable for risk-averse investors
- Does not guarantee income for life, only the specified period
Memory trick: Fixed-Period provides guaranteed income for a set Time, like a predictable income Timer.