If you want to work in the investment industry in the United States, you’ll likely need to pass the General Securities Representative Exam, known most commonly as the Series 7. While the annual pass rate lands well above that of the CFA exam, only 65% successfully make it through the Series 7 on their first time, so the pressure is on. Without it, you can't sell securities.
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 pass the Series 7 and other lesser-known financial exams.
1. Put the time in
While each level of the CFA requires a minimum of 300 hours of study, 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 study material 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.
As of October 2018, you’ll also need to pass the Securities Industry Essential (SIE) exam to earn your Series 7. The bad news is you now have to take two tests. The good news is that the number of combined questions is actually smaller than the old Series 7. Finra simply extracted all the common material that covered basic industry knowledge and created a supplementary exam that people can take without being sponsored by a broker-dealer. The motivation was to eliminate the need for test-takers to demonstrate their understanding of the basics several times if they need multiple Finra licenses. The SIE is also being looked at as a resume sweetener for people who want to enter the investment industry.
2. Think concepts, not questions
A common mistake made by test takers is memorizing answers rather than digesting the actual material, Marks said. It provides a false sense of confidence and is a formula for not passing. When you simply pair questions and answers, wording and delivery can change, and you’ll need to be flexible enough to adapt. “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.
3. Don’t waste time on the technical subjects
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."
4. Know the bell curve rule
There are two facts to consider when you’re pondering how much time to spend on each question. First, there are 125 questions in the new Series 7, down from 250, plus 10 non-graded questions, so don't get thrown off if you see something unexpected. Those 10 are designed to help Finra test out new material. Second, 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 three-hours and 45 minutes. That's down from six hours, but 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.
"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,” he adds.
FINRA constantly updates the Series 7 content outline. One 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.
7. Go above and beyond
You need 72% to pass the Series 7 exam, 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.
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