Client Profile

Two clients earn the same amount over a year, one entirely on salary and the other entirely on commission. When sizing the cash reserve in each profile, the adviser should conclude that the commissioned client needs

1. A.a larger reserve, because the timing and the size of her income are far less predictable.Correct. The buffer is sized against the gaps in the income stream, which is exactly what commission pay creates.
2. B.the same reserve, since the two clients earn an identical amount across a full year.Wrong. The annual total reveals nothing about whether the money arrives evenly enough to meet monthly obligations.
3. C.a smaller reserve, because commission income rises sharply when business is strong.Wrong. Upside in a good month does nothing to fund the fixed costs of a month that produces nothing.
4. D.no reserve at all, provided her portfolio can be liquidated quickly whenever needed.Wrong. Forcing a sale at an unplanned moment is precisely the outcome the reserve exists to prevent.

Why: A cash reserve is sized against the variability of income and the size of fixed obligations, not against the annual total earned. Commission income arrives unevenly and can stop for months at a time, so a longer buffer is needed to carry fixed costs through a dry period without disturbing invested assets. The salaried client faces the risk of losing the job but not the risk of an ordinary month producing nothing. If the commissioned client had a substantial guaranteed draw against future commissions, the gap between the two reserves would narrow.

An adviser gathering data wants to verify what a client has said about his marginal tax bracket rather than rely on his recollection. The most useful document to request is

1. A.the most recent statement for the brokerage account the client holds elsewhere.Wrong. It reports holdings and transactions but never the taxable income figure that sets a bracket.
2. B.the most recent federal income tax return the client filed.Correct. Filing status and taxable income appear there together, which is what determines the bracket.
3. C.a credit report obtained from a consumer reporting agency.Wrong. It documents borrowing history and contains no statement of income at all.
4. D.the summary plan description for the retirement plan of his employer.Wrong. That describes the terms of the plan rather than anything about the finances of this client.

Why: Data gathering means corroborating what the client reports, and each document answers only the question it was designed to answer. A federal income tax return shows filing status, taxable income, the treatment of investment income and any carryforwards, which together establish the bracket and much else the plan depends on. A brokerage statement shows holdings and activity but not the income figure that sets the bracket, and a credit report addresses borrowing rather than earning. Where the client had a highly unusual year, the adviser would need to ask whether the return is representative before relying on it.

Comparing a long futures position with a long call option on the same underlying, the futures position

1. A.carries a premium cost that the long call option does not.Wrong. The premium belongs to the option, and a futures position is opened without paying one.
2. B.carries an obligation and an open-ended loss, while the call risks only the premium.Correct. Right versus obligation is the distinction, and it determines the shape of the loss.
3. C.limits the possible loss to the initial margin deposited with the broker.Wrong. Margin is a performance bond, and losses on the contract can exceed it substantially.
4. D.gives the holder a right to take delivery that he is free to decline.Wrong. Declining is the option feature; a futures holder is obligated on both sides of the move.

Why: The essential difference between the two instruments is whether the holder has a right or an obligation. A long call costs a premium and confers a right, so the worst outcome is that the option expires unused and the buyer loses what he paid and nothing more. A long futures position costs no premium and creates an obligation, so the holder participates in the full decline of the underlying and can lose far more than the margin deposited. Margin is a performance bond posted against that obligation rather than a ceiling on the loss, which is why the two instruments belong in very different places in a client profile.

A couple have a child with a permanent disability who receives means-tested government benefits. When they ask their adviser how best to leave assets for that child, the adviser should first recognise that

1. A.the bequest should be maximised, since larger assets always improve the position of the child.Wrong. Assets counted as resources of the child can withdraw more support than they replace.
2. B.the child should receive the assets outright so that they are available without delay.Wrong. Outright ownership is exactly what puts the means-tested eligibility at risk.
3. C.how the assets are held matters more here than which investments are selected for them.Correct. Ownership drives the eligibility question, which dominates any difference in investment return.
4. D.the question is a legal one and therefore falls outside the client profile altogether.Wrong. Benefit implications belong squarely in the profile even though the drafting belongs to counsel.

Why: Government benefit implications are an express part of a client profile, and for a beneficiary receiving means-tested support the form of ownership can matter more than anything about the investments. Assets left outright are counted as resources of the child and can suspend eligibility, so a bequest intended to help may cost more in withdrawn support than it delivers in value. The planning answer generally lies in how the assets are held rather than in how much is left or how it is invested, and the drafting itself belongs to qualified counsel. Increasing the amount without addressing the structure makes the problem larger rather than smaller.