Series 7 Exam: How to Select the Right Account for Your Clients

Besides knowing a customer’s investment profile, you need a basic understanding of the types of accounts for the Series 7 exam. Investors can open many different types of accounts through a broker-dealer. Fortunately, most of them are pretty straightforward.

Single and joint accounts

Some investors prefer to share; others like to go it alone. Whatever their preference, adults can open up accounts that fit their needs:

  • Single (individual) accounts: Naturally, this account is in the name of one person. The key thing for you to remember is that individuals may not open accounts in other people’s names without written permission.

  • Joint accounts: This account is in the name of more than one person. All individuals named on the account have equal trading authority for the account. For Series 7 exam purposes, you need to be familiar with two types of joint accounts:

    • Joint tenants with rights of survivorship (JTWROS): When a joint tenant named on the account dies, his or her portion of the account passes on to the surviving joint tenant. These accounts are usually set up almost exclusively for husbands and wives. In states where community property laws exist, investments acquired during the marriage are automatically presumed to be jointly owned by the husband and wife.

    • Joint with tenants in common (JTIC): With this type of account, when one tenant of the account dies, his or her portion of the account becomes part of his or her estate. JTICs are usually set up for individuals who aren’t related.

The following question tests your knowledge of account types.

All of the following people may open a joint account EXCEPT

(A)    Two friends
(B)    A husband and wife
(C)    A parent and minor son
(D)    Three strangers

The right choice here is (C). A joint account is an account in the name of more than one adult. Choices (A), (B), and (D) are all possible for joint accounts; however, an account opened for a minor must be a custodial account.

Trust accounts

Trust accounts are ones that are managed by one party for the benefit of another party. A specific type of trust account that you’re most likely to see on the Series 7 exam is a custodial account.

A custodial account is set up for a child who’s too young to have his own account. A custodian (adult) makes the investment decisions for the account. Any adult can open a custodial account for a minor, so the people named on the account don’t have to be related.

Additionally, because the minor is too young to make investment decisions for himself, some rules are specific to custodian accounts:

  • There can only be one custodian and one minor per account.

  • The minor is responsible for the taxes (the minor’s Social Security number is registered for the account).

  • The account is registered in the name of the custodian for the benefit of the minor (the custodian is responsible for endorsing all certificates).

  • The account can’t be held in street name.

  • Securities can’t be traded on margin or sold short.

  • Anyone may give a gift of cash or securities to the minor. The gift is irrevocable (can’t be refused by the custodian).

  • If an account receives rights, the custodian can’t let the rights expire. Because rights have value, a custodian can exercise or sell the rights.

Discretionary accounts

Decision making can be stressful, and some investors don’t want to deal with it. With a discretionary account, an investor can give you (the registered rep) the right to make trading decisions for the account. All discretionary accounts need a written power of attorney signed by the investor, which gives trading authorization to the registered rep.

Here are some specific rules for discretionary orders that you’re likely to see on the Series 7 exam:

  • Each discretionary order must be marked as discretionary on the order ticket.

  • As with other orders, principals must sign each order ticket.

  • A principal needs to review discretionary accounts regularly to make sure reps don’t trade excessively to generate commissions, which is called churning.

Corporate accounts

Only incorporated businesses can open corporate accounts. If you’re opening a corporate account, you need to obtain the tax ID number of the corporation, which is similar to an individual’s Social Security number. Additionally, you need to obtain a copy of the corporate resolution, which lets you know who you should be taking trading instructions from.

If a corporation wants to open a margin account, you also need a copy of the corporate charter (bylaws). The corporate charter has to allow the corporation to purchase securities on margin.

Unincorporated associations

An unincorporated association is sometimes called a voluntary organization. An unincorporated association is a group of two or more individuals who form an organization for a specific purpose. If an unincorporated association has too many characteristics of a corporation, such as having a board of directors, limited liability, and so on, it may be treated and taxed at a higher rate, as if it were a corporation.

Institutional accounts

Accounts set by institutions such as banks, mutual funds, insurance companies, pension funds, hedge funds, and investment advisers are considered institutional accounts. Their role is to act as specialized investors on behalf of others.

Partnership accounts

Two or more individual owners of a business that’s not set up as a corporation may set up a partnership account. All partnerships must complete a partnership agreement, which the broker-dealer has to keep on file. The partnership agreement, like a corporate resolution, states who has trading authorization for the account so you know who you’re supposed to be taking orders from.

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