Uniform Investment Adviser Law Exam (Series 65) Study Guide

The Series 65 is written by NASAA and delivered by FINRA, and both hands show in the items. NASAA writes for state regulators, so stems are built around an investment adviser representative who has to decide what a rule requires, not around a broker-dealer back office. Nearly every item in our bank opens with a short scenario: a client profile, a Federal Reserve action, a bond with one feature named, an adviser who wants to charge a fee a particular way. The question then asks for the label, the consequence, or the obligation that follows.

Three stem forms to recognize

The plain form asks which order type, what this is called, or what the adviser must obtain. The superlative form adds MOST, BEST, or PRIMARY, which signals that several choices are partly true and you must rank them. The reversal form, built on EXCEPT or LEAST, is rarer here than on entry-level exams, but when it appears it is attached to a list of Fed tools or a list of adviser obligations, so read the last word of the stem before you read the choices.

Scored and unscored items

You see 140 questions, and 10 of them are unscored pretest items that are not marked. Only 130 count, and you pass with 92 correct. You have 180 minutes, so the budget is comfortable if you do not stall: a scenario stem with four long choices should take under a minute and a half, and any item that has taken longer gets flagged and revisited after the first pass.

How to use the bank

Our bank holds 387 published questions across four outline areas. Work it in two passes. In the first pass, go one area at a time and read every explanation, including the ones you got right, because the explanations name the pattern the item belongs to. In the second pass, take the whole bank mixed, timed, and untargeted, because the real exam interleaves areas and the recognition step is what you are training. The sections below name the recurring patterns in each area and walk through two bank questions per area so you see the pattern before you drill it.

Economic Factors and Business Information holds 60 of the 387 questions in our bank, the smallest of the four areas. Three patterns account for most of them. The first is Fed-tool direction: the stem names a policy goal (tighten, ease, raise the money supply) or a specific action (buy Treasuries, raise the reserve requirement) and asks for the matching action or effect. The second is economic-indicator classification: a scenario describes a labor-market, output, or price measure and asks whether it leads, lags, or moves with the business cycle. A third pattern, financial-statement and ratio analysis, gives a balance sheet or income statement figure and asks for the ratio or the ratio interpretation it produces.

Worked example: Fed-tool direction

The Federal Reserve wishes to tighten monetary policy. Which action is consistent with that objective?

1. Selling government securities in the open market
2. Lowering the discount rate
3. Reducing the reserve requirement
4. Purchasing government securities in the open market

Answer: Selling government securities in the open market

Tightening means pulling reserves out of the banking system. When the Fed sells securities, dealers pay with reserves, so the money supply shrinks and short rates rise. Purchasing securities is the mirror image and is the most-chosen wrong answer because the phrase open market appears in both. Lowering the discount rate and cutting the reserve requirement both make it cheaper or easier for banks to lend, which is easing. Memorize the direction once: sell, raise, raise is tight; buy, lower, lower is loose.

Worked example: economic-indicator classification

An economist tracks how long, on average, unemployed workers have been out of a job, noting that this measure keeps rising for months after overall economic activity has already begun to recover. This measure is generally classified as which type of indicator?

1. A lagging indicator, because it confirms a trend only after the trend is already underway
2. A leading indicator, because it changes before overall economic activity turns
3. A coincident indicator, because it moves in step with current economic activity
4. A monetary policy tool, because it is set directly by the central bank

Answer: A lagging indicator, because it confirms a trend only after the trend is already underway

Average duration of unemployment is a lagging indicator: employers are slow to resume hiring the longest-unemployed workers even after broader activity has turned up, so this measure keeps worsening well after a recovery has already started. A leading indicator instead shifts ahead of the economy, and a coincident indicator moves together with it in real time, neither of which fits a measure that confirms a turn only after the fact. It is also a labor-market statistic, not a policy tool set by a central bank.

Numbers and rules the bank keeps testing

• Correlation runs from negative one to positive one; the closer to negative one, the greater the diversification benefit, and a value near zero still helps.
• Standard deviation is total risk; beta is systematic risk only; the Sharpe ratio divides excess return by standard deviation, while the Treynor ratio divides it by beta.
• Positive alpha is return above what CAPM predicts for the portfolio beta.
• Leading indicators: building permits, new orders, jobless claims, stock prices, the yield spread. Coincident: industrial production and personal income. Lagging: average unemployment duration and the prime rate.
• Real GDP strips out price changes; nominal GDP does not. Two straight quarters of falling real GDP is the working definition of recession.
• Discount rate is Fed-to-bank; federal funds rate is bank-to-bank overnight; prime is bank-to-customer.

Trap to avoid

The most-missed distinction is total risk versus systematic risk. When a stem compares two funds with equal average returns and different swings, the answer is standard deviation, never beta, because nothing in the stem mentions the market. When a stem asks what diversification cannot remove, the answer is systematic risk, and beta is its measure. Candidates who reach for beta whenever they see the word risk lose several items in this area.

Investment Vehicle Characteristics holds 95 of the 387 questions in our bank, and this guide covers it in two sections. This first section covers bonds, preferred and common stock, and the risks named on the outline. Three patterns dominate. Feature-to-risk: the stem names a bond or stock feature (call, sinking fund, conversion, cumulative) and asks what it does to the holder. Rank-the-claim: who is paid first in liquidation, or which yield is highest for a premium or discount bond. Yield arithmetic: current yield, the after-tax comparison of a corporate against a municipal, and the direction a bond price moves when rates change.

Worked example: yield arithmetic

An investor purchases a bond with a 5 percent coupon at a price of 90% of par. What is the current yield?

1. 5.56 percent
2. 5.00 percent
3. 4.50 percent
4. 9.00 percent

Answer: 5.56 percent

Current yield is annual coupon income divided by what the bond costs today. A price of 90% of par means ninety percent of par, so the coupon in dollars is divided by a price below par and the yield comes out above the coupon rate. The 5.00 percent choice is the nominal yield, which is what you get if you forget the bond is at a discount. The 4.50 percent choice multiplies the coupon by the price fraction instead of dividing, the arithmetic slip the item is built to catch. The 9.00 percent choice is manufactured from the price itself. A discount bond always has current yield above coupon; a premium bond has it below.

Worked example: feature-to-risk

A company suspends its preferred dividend for two years due to financial distress. If the preferred stock carries a cumulative feature, what happens to the missed dividends?

1. They are permanently forfeited once a dividend period is missed
2. They accumulate as arrears and must be paid before any common dividend is resumed
3. They convert automatically into additional common shares
4. They are paid only if the company is liquidated

Answer: They accumulate as arrears and must be paid before any common dividend is resumed

Cumulative means the skipped payments are recorded as arrears, and the company cannot pay a cent to common holders until every dollar in arrears is paid. The forfeiture choice describes non-cumulative preferred and tempts anyone who reads suspends as final. The conversion choice borrows a different feature, convertible preferred, which the bank tests separately. The liquidation-only choice confuses a dividend arrearage with a liquidation preference; arrears are due whenever common dividends resume, not only when the company winds up. Read the feature word in the stem first, then match it to its single consequence.

Numbers and rules the bank keeps testing

• Liquidation order: secured debt, senior unsecured, subordinated debentures, preferred, then common, which holds only a residual claim.
• Premium bond yields rank nominal, current, yield to maturity, yield to call from highest to lowest; a discount bond reverses the order; at par all four match.
• A call provision helps the issuer and creates reinvestment risk for the holder; a put provision helps the holder; a sinking fund reduces the risk of default at final maturity.
• A conversion feature lets the issuer pay a lower coupon because the option has value to the buyer.
• Longer maturity and lower coupon mean higher duration and a bigger price drop when rates rise; zero-coupon bonds have no reinvestment risk but the most rate sensitivity.
• TIPS principal follows the CPI and pays no less than original par at maturity; savings bonds are non-marketable; Treasuries carry negligible credit risk.
• General obligation bonds are repaid from taxing power; revenue bonds from the project; a double-barreled bond carries both pledges.
• After-tax yield on a taxable bond is the yield times one minus the bracket; tax-equivalent yield divides the municipal yield by the same factor.

Trap to avoid

Do not confuse the risk a feature creates with the risk it removes. A callable bond removes nothing for the holder; it adds reinvestment risk and caps price appreciation. A zero-coupon bond removes reinvestment risk but adds rate sensitivity and keeps credit risk. A principal-protected structured note removes market risk on principal only as long as the issuing bank stays solvent, so credit risk remains. The wrong choices in this area are almost always the eliminates claim, and the correct answer is the one that names what the feature leaves behind.

The second half of the products area covers funds, options, annuities, insurance, and retirement plans, and it holds the most repeated pattern in our whole bank: who-bears-the-investment-risk. Variable annuity, variable life, fixed annuity, defined benefit, defined contribution: each stem asks whose account value moves with the market, and the answer is always whoever chose the investments. The second pattern is maximum-loss-maximum-gain for a long call, a long put, a covered call, a protective put, a short sale, and a margin purchase. The third is which-structure: open-end versus closed-end versus ETF versus unit trust versus hedge fund, told apart by how shares are created and redeemed and how quickly you can get out.

Worked example: who-bears-the-investment-risk

An investor holds a variable annuity during the accumulation phase. Who bears the investment risk?

1. The contract owner
2. The insurance company
3. The state guaranty association
4. The separate account custodian

Answer: The contract owner

The owner picks the subaccounts, the subaccounts rise and fall, and the account value follows, which is why a variable annuity is a security and needs a securities license to sell. The insurance company is the tempting wrong choice because it does carry mortality and expense risk, and it carries investment risk on a fixed annuity, but not here. The guaranty association backs insurer insolvency, not market losses. The custodian holds the separate account assets and has no stake in their performance. Whenever the stem says variable, the risk sits with the person who chose the investments.

Worked example: maximum-loss-maximum-gain

An investor buys a call option on a stock. What is the maximum loss and the maximum gain?

1. Maximum loss is the premium paid; maximum gain is theoretically unlimited
2. Maximum loss is unlimited; maximum gain is the premium received
3. Both loss and gain are limited to the strike price
4. Maximum loss is the strike price; maximum gain is the premium

Answer: Maximum loss is the premium paid; maximum gain is theoretically unlimited

A buyer can always walk away, so the most a long call can lose is what it cost, and because the stock has no ceiling neither does the gain. The unlimited-loss choice describes the uncovered call writer, and candidates who have just studied short sales pick it by reflex. The strike-price choices are built from a number that appears in every option item but marks the boundary of exercise, not of profit or loss. Build a four-cell grid in your head, buyer or writer against call or put, and fill in premium and unlimited before you read the choices.

Numbers and rules the bank keeps testing

• Open-end funds use forward pricing: an order placed before the cutoff fills at the next NAV calculated after the close.
• Closed-end funds and ETFs trade all day at market prices that can differ from NAV; ETF share counts change through in-kind creation and redemption by authorized participants.
• A front-end load reduces the dollars that go to work; the ongoing distribution charge is deducted from fund assets and disclosed in the fee table.
• Hedge funds and direct participation programs impose lock-ups and lack a secondary market; a publicly traded REIT gives real estate exposure with daily liquidity.
• Covered call: income now, upside capped at the strike. Protective put: floor under the stock, upside kept. Short sale and margin: losses can exceed the cash committed.
• Fixed annuity and defined benefit plan: the insurer or employer bears the risk. Variable annuity, variable life, defined contribution: the owner or participant bears it.
• Roth IRA: after-tax contributions, tax-free qualified distributions, no lifetime required minimums for the original owner.
• Employer-plan fiduciaries get relief from participant losses only when participants control their accounts and have a broad menu with adequate information.

Trap to avoid

The distinction candidates miss most is the buyer position versus the writer position. Every option stem in the bank can be answered by asking who paid the premium: the payer can lose only the premium, the writer can gain only the premium, and the unlimited label attaches to the other side of each. The wrong choices swap those two words, so an answer that pairs unlimited loss with a buyer, or premium-limited gain with a buyer, is wrong before you consider which way the stock moves.

Client Investment Recommendations and Strategies holds 116 of the 387 questions in our bank, tied with Laws, Regulations, and Guidelines as the heaviest area. Three patterns run through it. Suitability reconciliation: the stem gives a client's stated preference and a set of financial facts that pull the other way, and asks how the adviser should reconcile them. Tax consequence: a sale and repurchase, an inheritance, or a choice of account type, decided by one rule. A third pattern, theory-and-strategy recognition, asks you to name a capital market theory such as CAPM, Modern Portfolio Theory, or the efficient market hypothesis, or a portfolio management style or technique, from a description rather than its label.

Worked example: suitability reconciliation

Client Teo says he is comfortable with substantial volatility, but his financial situation shows minimal savings, an upcoming large medical expense, and heavy dependence on his current income. How should the adviser reconcile Teo's stated comfort with his financial circumstances?

1. Follow Teo's stated comfort with volatility exactly, since a client's own words always override other considerations
2. Weigh Teo's limited financial capacity to absorb losses alongside his stated attitude, and lean toward a more conservative recommendation
3. Ignore Teo's financial situation entirely and build the portfolio using only average client data for his age group
4. Recommend the most aggressive portfolio available, since expressed comfort with risk is the only input that matters

Answer: Weigh Teo's limited financial capacity to absorb losses alongside his stated attitude, and lean toward a more conservative recommendation

Suitable recommendations must reconcile a client's stated risk tolerance with his actual capacity to bear loss; when someone with thin reserves and near-term obligations expresses comfort with volatility, the adviser should weigh that limited capacity heavily and lean more conservative than the stated preference alone would suggest. Following the stated comfort level in isolation ignores real financial constraints that could leave Teo unable to meet the coming expense. Substituting generic peer-group data or defaulting to the most aggressive option available both disregard Teo's own documented circumstances entirely.

Worked example: tax consequence

An investor sells a stock at a loss and repurchases substantially identical shares eleven days later. What is the tax consequence?

1. The loss is disallowed under the wash sale rule and added to the basis of the new shares
2. The loss is fully deductible because more than ten days elapsed
3. The loss is converted into a long-term capital loss
4. The loss is deductible but the new shares receive a zero basis

Answer: The loss is disallowed under the wash sale rule and added to the basis of the new shares

The wash sale window surrounds the sale date on both sides, and eleven days is well inside it, so the loss is disallowed for now and added to the cost basis of the replacement shares, which recovers it at the eventual sale. The more-than-ten-days choice invents a shorter window and is the most-chosen distractor because eleven sounds specific. The long-term conversion choice confuses the wash sale rule with holding-period tacking. The zero-basis choice gets the mechanics backwards: the basis goes up, not down. The rule defers a loss; it never destroys one.

Numbers and rules the bank keeps testing

• A stop order becomes a market order once the stop price trades and does not guarantee the price; a limit order guarantees the price and not the fill.
• Inherited stock takes a stepped-up basis at date of death; gifted stock carries the donor's basis.
• Asset location: bond interest belongs in the IRA, growth equity in the taxable account.
• Time-weighted return measures the manager; dollar-weighted return measures the client's own experience.
• Dollar cost averaging lowers average cost below average price but guarantees nothing; a projection presented as assured, or any guarantee against loss, is a prohibited communication.
• A wrap fee bundles advice, execution, and custody into one asset-based charge.
• Weak-form market efficiency defeats technical analysis; the semi-strong form adds public information and defeats fundamental analysis too; the strong form adds private information as well.

Trap to avoid

The single most-missed distinction is stated risk tolerance versus financial capacity to bear risk. Risk tolerance is how much volatility a client says he or she can accept; capacity is how much loss the client's income, savings, time horizon, and obligations can actually absorb. When the two conflict, the recommendation follows the lower of the two, not the client's stated comfort. A stem that names a large upcoming expense, thin savings, or dependence on current income beside an expressed appetite for risk is testing capacity, and the correct choice always leans more conservative than the stated preference alone would suggest.

Laws, Regulations, and Guidelines holds 116 of the 387 questions in our bank, tied with Client Investment Recommendations and Strategies as the heaviest area, and its patterns are the closest in our bank to the exam's name. Who-registers-where: an adviser above the federal assets threshold registers with the SEC as a federal covered adviser and makes notice filings in the states, while its representatives can still owe state registration where they have a place of business. Which-document: Form ADV Part 2A is the client brochure, Part 1 is the regulator's filing, Form U4 registers individuals. What-consent-is-required: assignment of the contract, principal trades, performance fees, custody, referral payments, and testimonials each have a specific disclosure or consent trigger, and the wrong choices offer the trigger from a neighboring rule. A fourth pattern, name-the-practice, asks you to label a described action as churning, front running, insider trading, or another prohibited practice from the ethics chapter of the outline.

Worked example: who-registers-where

Which statement about an investment adviser representative's registration is accurate under state law?

1. An IAR of a federal covered adviser may still be required to register in a state where the IAR has a place of business
2. IARs of federal covered advisers are never required to register with any state
3. IAR registration is handled exclusively by the SEC in all cases
4. IARs need not register anywhere if the adviser is properly registered

Answer: An IAR of a federal covered adviser may still be required to register in a state where the IAR has a place of business

Federal preemption protects the firm, not the people. The state cannot demand full registration of an SEC-registered adviser, but it can register the representative who sits in an office inside its borders. The never choice extends preemption to individuals, which is the single most common misconception in this area. The exclusively-by-the-SEC choice is wrong because the SEC does not register representatives at all. The need-not-register-anywhere choice confuses the firm's status with the individual's. When a stem puts IAR and place of business in the same sentence, the state is in charge.

Worked example: what-consent-is-required

An adviser proposes to act as principal, selling a security from its own inventory to an advisory client. What does the Advisers Act require?

1. Written disclosure and client consent obtained before completion of each such transaction
2. Disclosure on the next quarterly statement
3. Nothing beyond the trade confirmation
4. Only the approval of the adviser's chief compliance officer

Answer: Written disclosure and client consent obtained before completion of each such transaction

A principal trade puts the adviser on the other side of its own client, so the Advisers Act demands written disclosure of that capacity and the client's consent before each trade completes, one trade at a time; a standing blanket authorization does not satisfy it. The quarterly-statement choice tempts because periodic disclosure is how many other conflicts are handled. The trade-confirmation choice is the broker-dealer standard, not the adviser standard. The chief compliance officer choice substitutes an internal sign-off for the client's own consent, which no adviser rule allows. The same per-transaction requirement covers agency cross trades.

Numbers and rules the bank keeps testing

• Brochure delivery: before or at the time the advisory contract is signed, with an annual update or summary of changes delivered after fiscal year end.
• Custody exists when the adviser holds client assets or can withdraw them, including by deducting fees; discretionary trading authority alone is not custody.
• Performance fees are allowed only for qualified clients and a few other categories; written consent from an ordinary client does not unlock them.
• A broker-dealer whose advice is solely incidental and who receives no special compensation is excluded from the adviser definition.
• Anti-fraud provisions reach every adviser, registered or not; the de minimis exemption covers an adviser with no place of business in a state and only a few residents as clients.
• Testimonials are permitted with disclosure of client status and compensation; paid referrals need a written agreement describing the compensation.
• Investment adviser representatives complete 12 continuing education credits each year, split into 6 credits of ethics and professional responsibility and 6 credits of products and practice.
• State securities registration proceeds by qualification, coordination, or notification; a defrauded client keeps a private right of action for rescission or damages.

Trap to avoid

The single most-missed distinction is custody versus discretion. Discretion is the power to decide what to buy and sell; custody is the power to take assets out. An adviser with a limited trading authorization has discretion and no custody, so no surprise examination is required. An adviser that can deduct its own fee from the account has custody even though it has never held a certificate. The wrong choices in the custody items always try to make discretion sound like custody, and the correct answer always hinges on the ability to withdraw.

The plan below runs through the four outline areas in order of their weight in our bank, so the two heaviest areas come first and get the most days. Every session ends at the Series 65 practice bank, and the last two days lean on the cheat sheet.

Week one: one area at a time

• Days one through three: Client Investment Recommendations and Strategies, 116 questions in our bank. Day one covers client types, client profiles, and the suitability triangle of goals, risk tolerance, and capacity. Day two covers capital market theory, portfolio management strategies and styles, and portfolio performance measures. Day three covers tax considerations, retirement plans, ERISA, and the ownership and estate-planning choices an adviser recommends.
• Days four through six: Laws, Regulations, and Guidelines, 116 questions in our bank. Day four covers registration of advisers, representatives, broker-dealers, and their agents. Day five covers registration of securities and issuers and the state Administrator's remedies. Day six covers required client disclosures and the ethical and fiduciary obligations chapter, including every named prohibited practice.
• Day seven: Investment Vehicle Characteristics, 95 questions in our bank. Cover cash equivalents, fixed income, and equity securities in the morning, then pooled investments, derivatives, alternative investments, and insurance-based products in the afternoon, closing with the who-bears-the-risk table for variable versus fixed products.

Week two: mix, time, and repair

• Day eight: Economic Factors and Business Information, 60 questions in our bank. Build the Fed tightening-versus-easing grid and the leading, coincident, and lagging indicator lists from memory.
• Days nine and ten: The full bank, mixed and timed, at the pace the real exam allows: 180 minutes for 140 items, which leaves no room to reread a stem twice.
• Days eleven and twelve: Return to the two areas with the lowest score from the timed run, reread every explanation you missed, then retake only those areas.
• Day thirteen: Cheat sheet only. Recite the if-then rules, then the numbers table, then the liquidation order and the yield ranking out loud.
• Day fourteen: One final timed pass through the full bank in the morning, then stop. A score of 92 or better on the scored portion is the pass line, and because you cannot identify the pretest items you should aim above it.

Confirm your appointment details on FINRA's page the night before, and bring the identification named in your confirmation.