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Seven tips for acing the Series 7 and other financial exams

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Taking the magnificent Series 7

Success in the Financial Industry Regulatory Authority’s General Securities Representative Exam, more commonly known as Series 7, is fundamental to anyone wishing to work in the investment industry in the United States. Before you can sell securities, you need to pass the test. Fail, and you could lose your job – the pressure is on.

The good new is that – unlike the CFA exams where only 46% of candidates make the grade – around 65% of those taking the Series 7 pass”. But there’s clearly still room to falter.

We spoke to Brian Marks, managing director of New York-based FINRA Licensing Exam preparation firm, Knopman Marks Financial Training, on what it takes to make it through the Series 7 exams.

1. Put the time in

If the CFA requires 300 hours of study for every level, the recommended prep time for the Series 7 exam – assuming you’re new to the industry – is 80-100 hours. This should mean not only consuming the relevant textbooks, but undertaking at least 1,000 practice questions and taking live exams so you can gain an understanding of the pressure you’ll be under on the day.

2. Think concepts, not questions

You will skip questions during any practice exams, but don’t panic and don’t assume that individual questions will crop up anyway. The key, says Marks, is to learn concepts rather than rely on your memory: “People try brute force to memorize formulas rather than understanding the concepts. If your memory fails on the exam, there is no backup,” he says.

The exam covers a wide swath of material, and it’s important to be familiar with concepts such as limited partnerships, annuities, mutual funds, exchange-traded funds (ETFs) and collateralized debt obligations (CDOs).

“Investment products and terminology add up to a significant number of questions on the test,” Marks said.

3. Don’t spend time on the more technical subjects

In every financial exam, there are topics that necessitate more study than others, largely because of their complex nature. In the Series 7, a lot of candidates are guilty of spending way too much time on the options and corporate bonds sectors.

“These two topics account for about 20% of the exam,” says Marks.“The old story about the Series 7 was that options and municipal bonds used to make up close to 50% of the test – that was your parent’s Series 7, but that’s not the case anymore.

“There’s a lot more variety and more emphasis on clients and constructing portfolios for them,” he said. “There’s a trend towards testing practical knowledge to ensure that people coming into the securities business are well equipped to meet clients’ investment needs.”

4. Know the bell curve rule

There are two facts to consider when you’re pondering how much time to spend on each question. Firstly, there are 260 questions in the Series 7 exams but only 250 count Share on twitter. The remaining 10 are experimental questions used by FINRA to help improve the test in the future. So, don’t freak out if you see a question on an unfamiliar topic, this can put you off other questions. Secondly, there’s a bell curve approach to the exam – the first and last 25 questions are the easiest, so don’t panic if it suddenly gets more difficult.

5. Train for what you’re getting yourself into

The Series 7 exam is six hours long and consists of 260 questions. It’s a beast. There’s a reason you need to immerse yourself into practice exams rather than simply bite-sized study chunks – you need to train like an athlete to get your mind and body used to this marathon period of time.

6. Make sure your study material is up-to-date

This sounds like a small thing, but out-of-date study material means that you’ve pretty much missed the boat. This is particularly the case as regulators change the rules ever more swiftly. The study material you use must be less than a year old.

Marks gives the example of the JOBS Act, passed by Congress years ago, but which has amendments under Regulation A due to came into effect on June 19, 2015. FINRA will expect candidates to be up to speed.

“Regulation A went into effect last year, so keep an eye out for crowd-funding questions, which may come up,” Marks said. “FINRA will also heavily weight questions on topics that have been the subject of abuses by industry personnel. Examples include variable annuity sales to senior citizens and sales of structured products to less sophisticated investors.”

Finra updated the Series 7 content outline for 2016, and a premium topic is making suitable investment recommendations.

“There’s a major trend toward the suitability of investments on the examination,” Marks said. “It’s not so much about rote memorization as it is knowing how particular clients would want to construct a portfolio and knowing what types of products would be appropriate for them.

“For example, zero coupon bonds might be appropriate for someone looking to save for their children’s college tuition, money market funds are good for a client seeking liquidity, while structured products such as equity-linked notes, sophisticated products with leverage, are likely appropriate only for institutional investors with a detailed understanding of how they work,” he said.

7. Go above and beyond

You need 72% to pass the Series 7 exams, but confidence is key. Realistically, you need to be hitting 80% in the practice exams to go into the day knowing you can pass. The bigger the margin for error, the better.

Handy hint: The hardest Series 7 questions, with expert answers

Marks provided these two questions, which he says are among the toughest in the Series 7 exam.

1. Variable annuities have investment features similar to mutual funds. Which of the following is not a characteristic of a variable annuity?

a. Tax-free distributions once retirement age is reached

b. Payout options that can deliver income over an investor’s life

c. Death benefits

d. Tax-deferred treatment of earnings

Answer: A. Variable annuities generally offer tax treatment similar to a corporate retirement plan, with after-tax contributions, tax-deferred growth, and distributions that are taxes as ordinary income.

2. In January, an investor opens an options position by purchasing 3 ABC March 30 calls and by selling 3 ABC March 40 calls. This position is a:

a. Debit spread

b. Credit Spread

c. Long Straddle

d. Short Straddle

Answer: A. An investor who buys and sells the same class of option (e.g. calls) on the same security is establishing a spread. In a debit spread, the customer pays a net premium. This position is a debit because the 30 call will have more intrinsic value, and therefore carry the greater premium.

3. Your client Steven, a New Jersey resident, recently inherited $750,000 from his uncle who passed away. Steven is 42 years old, married with two children ages 15 and 11, and is a partner in a dental practice.  He earns $325,000 with benefits. His wife Marie is a radiologist in a medical practice, earning $175,000. They can comfortably handle their mortgage, car payments, two annual vacations and a life insurance premium. You are re-assessing their portfolio, given their windfall.  How would you suggest they proceed?

a. 45% Money Funds, 35% State of New Jersey Bond Fund, 20% Index Fund

b. 65% Options, 20% REIT, 15% CMO

c. 40% AA Corp Bonds, 40% NJ Turnpike Bonds, 20% Sector Fund

d. 40% Zero Coupon Bond, 10% Options, 50% Large Cap Equity Fund

Answer: D. Their immediate cash needs can be funded through their salaries. They have cash that can be invested for growth, and enough disposable cash to speculate with options, albeit modestly. Additionally, the zero coupon bonds are a good way for them to save for their children’s college education.

Photo credit: LuckyBusiness/iStock/Thinkstock

Comments (4)

  1. I am interested in preparing and taking the Series 7 test, and would like your recommendations for the most efficient and proactive way of preparing for it, i.e. I want to pass the first time around with a score over 80. I’ve been in banking most of my 35+ year career. . .don’t know if that is a benefit or a detriment.

  2. I know that a S7 is just for us sales cretins and not the analysts like a CFA / S86 & 87, but c’mon eFinancial… “6. Make sure YOU’RE study material is up to date” (typo)? SMH

    Passed S7 on 1 May 2015 Reply
  3. Just passed the 66 today and the 7 a few weeks ago.
    FOR THE 7 and the 66 – THE BEST way to prepare for the exam is to take the class!! (I used stc because it was contracted by my company) and then review the material they give you from the class and refer back to the text book when you don’t understand a topic.
    The practice exams with answer mode on will prepare you the best.
    Make sure you understand all the answers.
    Don’t waste to much time on the textbook –
    I spent over a month going through the book, highlighting, taking online review quizzes by topic etc – WASTE OF TIME!!!! Take the class, then practice and learn and memorize from the tests.
    For the series 66 – I can honestly tell you that the practice exams by STC are exceptional. It is a tricky test and they TRY to fool you –
    you can understand a concept and still get an answer wrong simply because of the way the answer choices are given. . . so just know it all and then give it your best shot.
    Series 7 doesn’t try to purposefully trick you as much.

    series7series66 Reply
  4. Some good info and some bad info on here too. I recently passed the series 7 (2nd try). I’ll admit I was lazy the first go round and tried to side-step two particular chapters all together (margin and options). Skipping options was STUPID. You MUST understand options basics, spreads and straddles and basic calculations to pass this exam in all likelihood. The first exam really bit me. Keep in mind no two exams are the same and one persons exam can be totally different than others. I work for a large BD and had polled at least 20 people who’d taken the 7 in the past 6 months. Of all 20, no one said they got more than 25 options questions. I got around 50 the first test and 30 the second. Skipping options is very unwise.

    You will hear people say that test is unreal and couldn’t pass and people who say it’s not that hard study for two weeks. I’m here to tell you it is hard. I’m a college grad of a large university (graduated with a 3.0 ..I’m not Einstein but I’m not a dummy either) and have taken the life, health, series 6 and 63. It’s as hard as all those 3 combined. Everyone has their own “guaranteed way to pass the 7” but I can tell you what I learned (from failing and passing). I don’t recommend STC nor Pass Perfect. STC is too little information and Pass Perfect is like reading Chinese (for an American who can’t read Chinese that is). Kaplan is a good middle ground. Op for the two “cheat sheets” they sell with the books or taking their 4 day course ( I found it awful, but others don’t…all teacher dependent). The cheat sheets are like 15-20 a piece for the main piece covering everything but options and then the options cheat sheet. I made around 200 note cards total from these and the test/quizzes etc. Between following Kaplans 3 month plan (trust me, do it) and using the notecards you should be ok. Not everyone will be able to pass but don’t let anyone tell you that you can’t most importantly YOURSELF. It’s not about how hard you get hit, but about how hard you can get hit and get back up! ..stolen from rocky

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