The Series 65 exam is the Uniform Investment Adviser Law Examination developed by the North American Securities Administrators Association (NASAA). This exam qualifies prospective securities industry professionals as investment adviser representatives.
In this blog, we will discuss the structure of the Series 65 exam, highlight 4 highly-tested topics, and provide examples of questions you may encounter.
How is the Series 65 exam structured?
The Series 65 exam consists of 140 multiple-choice questions including Roman numeral style questions. Only 130 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 the pretest questions have sufficient statistics to be considered valid questions, they will be added to the test 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 3 hours to complete the exam and must correctly answer 92 of the 130 scorable questions to achieve a passing score of 70%.
The Series 65 exam 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 test takers enter the exam with no expectations concerning question difficulty. 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 an expectation of the 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 65 exam, you must demonstrate that you have the knowledge needed in four areas of competency to allow registration as an investment adviser representative. The Series 65 exam structure and breakdown is as follows:
|
Competency Areas |
Number of Questions |
Percentage of Questions |
|
I. Economic Factors and Business Information |
20 |
15% |
|
II. Investment Vehicle Characteristics |
32 |
25% |
|
III. Client/Customer Investment Recommendations and Strategies |
39 |
30% |
|
IV. Laws, Regulations, and Guidelines Including Prohibition on Unethical Business Practices |
39 |
30% |
|
Total |
130 |
100% |
View the NASAA Series 65 Content Outline
What topics should I focus on when studying for the Series 65 exam?
When it comes to studying for the Series 65, there are specific topics that are highly testable. The table above shows that 60% of the exam is based on investment recommendations and strategies, laws and regulations, and prohibited unethical business practices. Within this area, we have identified 4 topics that students should focus on:
- Making suitable recommendations
- State laws and regulations
- Federal laws and regulations
- Ethical business practices
Let’s take a look at each topic and explore some sample questions.
1. Making Suitable Recommendations
The Series 65 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 too much 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, along with having knowledge about the different types of investments and portfolios, it is important to have a basic understanding of several factors concerning the client 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 eliminate those answers.
Let’s look at a sample question:
An investment adviser 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?
- 30% aggressive growth, 20% international stock, 10% high-yield bonds, 40% blue-chip stocks
- 40% high-yield bonds, 30% blue-chip stocks, 30% ETFs
- 10% large-cap growth stock, 50% GNMA fund, 20% investment-grade bonds, 20% money market fund
- 50% GNMA fund, 50% money market 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. 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. State Laws and Regulations
The Series 65 exam places emphasis on knowing and understanding the state laws and regulations based on the Uniform Securities Act. These regulations define the individuals, securities, and transactions that require registration at the state level. They also define those that do not require registration either by exclusion or exemption. An exclusion means that registration is not required because the individual, security, or transaction does not meet the definition of the group in question and is excluded from registration requirements. An exemption means the item does meet the definition, but for some reason has been released from the obligations of the group in question. For this exam, it is important to differentiate between exclusions and exemptions even though both allow the group in question to avoid registration at the state level. The following video provides an explanation of broker-dealer exclusions and exemptions under the Uniform Securities Act.
3. Federal Laws and Regulations
The Series 65 exam expects you to understand the federal laws and regulations surrounding the securities industry. You will not only need to know and understand these regulations, but be able to compare and contrast them with the state regulations. For example, criminal penalties under federal law are greater than those under state law. When asked a question regarding criminal penalties, test takers will need to first discern if the question is asking about federal or state regulations.
4. Ethical Business Practices
The Series 65 exam will differentiate between unethical and fraudulent business practices. Fraudulent business practices rise to the level of criminal activity. While unethical business practices are prohibited, they are usually unintentional and not criminal. Among ethical business practices are the fiduciary obligations of investment advisers to their clients. The client's needs should be paramount to all investment decisions. Regulations address all aspects of the industry. This includes compensation structures, handling of client funds and securities, custody obligations, trading activities, conflicts of interest, criminal activities, ethical considerations, cyber security, privacy rules, data protection, and anti-money laundering.
Will there be math questions on the Series 65 exam?
While you may encounter math questions on the Series 65 exam, there are very few questions that will require you to make calculations. Questions covering math concepts will typically direct you to apply those concepts to hypothetical client interactions. You may be asked to select which formula is necessary to to find specific information relating to a potential or current investment. A question may require you to differentiate between the dividend discount model or discounted cash flow model. For example:
An investor believes that the market price of a particular stock will increase if the company continues to pay consistent dividends. What formula could the investor use to support or negate this theory?
- 72 ÷ Rate of Return = Number of Years
- Dividends per Share ÷ (Required Rate of Return - Dividend Growth Rate)
- Excess Return Above Risk Free ÷ Standard Deviation
- FV = P(1+r)n
The customer is looking for the effect dividends have on the market price of the stock. This is the definition of the dividend discount model, which uses the formula from answer choice B: Dividends per Share ÷ (Required Rate of Return - Dividend Growth Rate). Please note that the required rate of return is also called the cost of equity.
72 ÷ Rate of Return = Number of Years is the Rule of 72 and tells you how many years it will take to double the value of an investment if the rate of return is known. Excess Return Above Risk Free ÷ Standard Deviation is the Sharpe ratio which is used to determine how much risk was involved to obtain a given return. Finally, to determine the future value of an investment, the formula used is FV = P(1+r)n
How can I prepare for the Series 65 exam?
A.D. Banker offers a Series 65 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 60–90 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.
The Series 65 exam may be taken as a stand alone exam. In this case, successful completion will allow individuals to register as an investment adviser representative. This exam has no prerequisites or corequisites and can be taken without firm association.
