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 news 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.
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.
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."
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 more variety and more emphasis on clients and constructing portfolios for them. There’s a trend towards testing practical knowledge to ensure that people are well equipped to meet clients’ investment needs."
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. 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.
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.
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 that came into effect on June 19, 2015. FINRA will expect candidates to be up to speed.
"Keep an eye out for crowd-funding questions, which may come up. 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,” he adds.
Finra constantly updates the Series 7 content outline. A premium topic is making suitable investment recommendations. “There’s a major trend toward the suitability of investments on the examination," says Marks. "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 adds.
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.
Marks provided these three questions as examples of what you're likely to encounter on 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 pre-retirement distributions that are taxed 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.
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