Posted by Barb Gavitt, CDEI, ITP, SILA-F ● December 2, 2022
The Ultimate Guide to the Series 6 Exam
The Series 6 exam is an extension of the information learned with the Securities Industry Essentials (SIE) exam. The SIE introduces and defines security products, covers minimal taxation, and introduces some basic industry regulations. The Series 6 exam then requires you to apply that product knowledge to specific customer situations. In order to do this, you must have a greater knowledge of customer suitability, as well as the applicable regulations and tax ramifications associated with each recommended product or strategy. In this blog, we will discuss the structure of the Series 6 exam, highlight 4 highly tested topics in the Series 6 exam, and provide examples of questions you may encounter.
How is the Series 6 exam structured?
The Series 6 exam consists of 60 multiple-choice questions, of which 50 questions are scorable. The 10 additional questions are “pretest” questions that are randomly distributed throughout the exam and do not count for or against your score. Once these questions have sufficient statistics to be considered valid questions, they will be added to the testing provider’s pool of scored questions. As a test taker, you will never know which questions are pretest and must answer all questions to complete the exam, so you should treat every question as if it counts.
You will have 1 hour and 30 minutes to complete the exam and must correctly answer 70% (35 questions) of the 50 scorable questions to pass.
The Series 6 exam, like other FINRA exams, is presented in a bell curve. Exams presented in this manner should start with easier questions, move to more challenging questions, and end with easier ones. However, we recommend you not go into the exam with any expectations concerning question difficulty. This is because it can be discouraging to encounter a question that you consider difficult when you were expecting an “easy” question. Answer each question to the best of your ability, and don’t let a supposed order of difficulty dictate your overall confidence. Remember: if you have prepared for the exam properly, it won’t matter when the difficult concepts appear.
To pass the Series 6 exam, you must demonstrate that you have the knowledge needed to perform the four major job functions of an Investment Company and Variable Contracts Products Representative. The Series 6 exam structure and breakdown is as follows:
|Major Job Functions||Number of Questions||Percentage of Questions|
|1. Seeks Business for the Broker-Dealer from Customers and Potential Customers||12||24%|
|2. Opens Accounts After Obtaining and Evaluation Customers' Financial Profile and Investment Objectives||8||16%|
|3. Provides Customers with Information About Investments, Makes Recommendations, Transfers Assets, and Maintains Appropriate Records||25||50%|
|4. Obtains and Verifies Customers' Purchase and Sales Instructions; Processes, Completes, and Confirms Transactions||5||10%|
View the Series 6 Examination Content Outline
What topics should I focus on when studying for the Series 6 exam?
When it comes to studying for the Series 6, there are specific topics that are highly testable. The table above shows that 74% of the exam is based on prospecting potential clients, product knowledge, suitable recommendations, tax consequences, and regulations. Within this area, we have identified 4 topics that students should be sure to focus on:
- Making suitable recommendations
- Investment companies
- Mutual funds
1. Making Suitable Recommendations
The exam will present scenarios and then require you to choose an appropriate investment product or strategy. These scenarios may not provide all the details you feel are necessary to properly answer the question. Do not make assumptions or read anything into the scenarios; you will have to choose the best answer based solely on the information you are given.
When you encounter a suitability question, it is important to gain a basic understanding of several factors before choosing an answer. These factors include:
- Investment objective
- Time horizon
- Risk tolerance
- Other customer information
The questions will often provide this information. It will be up to you to find it. It can be helpful to identify answer choices that are definitely not suitable and then eliminate those answers.
Let’s look at a sample question:
A registered representative is meeting with a client that plans on retiring within 2 years. The client has built a substantial retirement portfolio and is now concerned with protecting their portfolio from market losses while creating a portfolio that will be their main source of monthly income throughout retirement. Which of the following may be a suitable recommendation for the client’s portfolio?
A. 30% aggressive growth fund, 20% international stock fund, 10% high-yield bond fund, 40% large-cap fund
We know the investor is looking for protection against the market and income through retirement. We don’t know how old the client is, but they could be in retirement for 20 years or more. When answering these types of questions, it is important to remember proper diversification and asset allocation. Choices A and B will give the customer too much exposure to market loss. At the same time, income may not last through retirement or keep pace with inflation if there is not at least a small portion invested in growth. In this case, it would normally be some type of conservative growth, such as large-cap stock. Since choice D does not have any portion invested in stock, the investor might outlive their assets or might not be able to sustain an appropriate amount of income throughout retirement. That leaves choice C, which is the correct answer as it is a suitable recommendation. With this choice, the investor will have a small portion in growth stock, a greater portion in income generating investments, and a small portion in cash or cash equivalents. The investor will have something in each of the asset classes.
2. Investment Companies
The Series 6 exam places an emphasis on knowing and understanding the different types of investment companies. Investment companies include unit investment trusts and management companies. Management companies are further broken down into open-end and closed-end funds. Open-end management companies are most often called mutual funds. There are virtually thousands of mutual funds available for investors to choose from. Therefore, the successful Series 6 candidate will gain a comprehensive understanding of these securities and obtain the ability to provide potential investors with the information necessary to aid in a suitable investment decision.
The following video provides an overview of management companies.
3. Mutual Funds
The Series 6 exam focuses a great amount on open-ended investment companies, which are commonly known as mutual funds. Test takers will be expected to understand their structure, sales charges, fees, investment objectives, risks, rewards, how to purchase and redeem them, and any prohibited activities. Since there are literally thousands of different mutual funds, test takers often struggle with the specific types of mutual funds, their investment objectives, and the different risks involved.
The following video reviews many of the broad categories of mutual funds along with their main investment objectives.
The Series 6 exam expects you to understand the tax implications associated with any recommendation. Taxation varies depending on product and account type, and this can make the overall concept quite challenging. Though licensed securities individuals cannot give tax advice to clients or potential clients, they do need to make suitable recommendations. Disclosing and explaining the tax ramifications of different products and account types is a crucial aspect of making a suitable recommendation.
The following video details some of the tax implications surrounding mutual fund investing.
How many math questions are on the Series 6 exam?
There are typically 5 or fewer math questions on the exam. They may incorporate suitability. For example, a question may require you to compare the taxable yield of a corporate bond to the tax-free yield of a municipal bond to determine which investment is most appropriate for the investor. Here’s an example of a math question you could see on the Series 6 exam:
After profiling a customer, a registered representative believes that the customer should purchase municipal bonds to benefit from the tax-free status of the bonds. The customer and registered representative have looked at several bonds in both categories and have determined that a choice needs to be made between a fully taxable 5% corporate debenture and a 3% general obligation bond. If the customer is in the 37% tax bracket, which of the following answers describes which bond should be chosen?
A. The corporate bond should be chosen because the net yield is 3.15%, which is greater than the municipal yield
Choice A is the correct answer. In this question, you will need to calculate the net yield, also known as the tax-free equivalent yield, to compare the taxable yield to the stated 3% tax-free yield. The formula is Net Yield = Taxable Yield x (100% - Tax Bracket).
That gives us 5% X (100% - 37%) = 3.15%. The 3.15% after yield is greater than the 3% tax-free yield being offered by the municipal bond. General obligation bonds are considered safer than corporate bonds and have a lower risk of default and general obligation bonds are not private purpose so therefore are not subject to potential taxation.
The following video illustrates the differences between the net yield and tax-equivalent yield.
How can I start studying for the Series 6 exam?
A.D. Banker offers a Series 6 online course that includes videos, practice exams, audio, activities, key facts, and can be supplemented with flashcards, study manuals, and web classes.
We recommend you spend 40–50 hours studying for your exam. Additionally, we recommend you spend most of your time reading the content. This strategy leads to comprehension, as opposed to memorization. Practice tests should be used as assessment tools to gauge your understanding; they should not be your exclusive way of learning the material.
Our guide to passing your licensing exam on your first attempt provides more information on how to best utilize our online course – check it out, and then get started today!
Topics: Securities, Series 6, SIE, FINRA, Series 63