In this article we are going to share some of the feedback we have received from hundreds of students who have taken the series 65 exam in the last several months. This group of students has provided us with an invaluable resource to help us prepare our clients to pass the series 65 exam. We incorporate all of this feedback into our test banks, study guides and video class training.
Is there a lot of math on the series 65 exam?
Most of our students have said that they had used the calculator between five and eight times on their exam. The math was not complicated and students found that the biggest challenge was remembering which numbers to use in the calculation. The vast majority of the concepts that could have been tested mathematically were instead tested conceptually. The questions required the test-taker to identify which valuation measure would be used in a given situation or to identify which concept the question was describing.
Key takeaway – Master the concepts and do not obsess over math problems when preparing for the exam.
What is a Totten Trust?
The series 65 exam will test a large number of features relating to the various types of trusts that may be established by an individual. A Totten trust is merely one type of trust you will see on your exam. Some of the trust you will see on your exam include:
A living trust – a living trust also known as an inter vivos trust is a trust that is established during the grantor’s lifetime. The grantor is the individual who establishes the trust and who places the assets into the trust for distribution to the beneficiaries.
A testamentary trust – a testamentary trust is a trust that is established under the terms of a person’s will. Rather than distributing the assets of the estate directly to the named beneficiaries, individuals from time to time will establish a testamentary trust as part of their estate planning. The assets of the estate will not be distributed directly to the beneficiaries. Instead the assets will be placed in the trust which has been created by the will. Once the assets have been placed in the trust, the assets will be distributed to the beneficiaries of the trust under the terms of the trust agreement.
A revocable trust – a revocable trust is a type of trust which is established by the grantor during their lifetime and allows the grantor to dissolve the trust and to reclaim the assets. The income generated by the revocable trust will be reported on the grantor’s tax return. All assets placed in a revocable trust revert back to the grantor’s estate at the time of the grantor’s death. As a result the assets in the revocable trust could be subject to estate tax.
An irrevocable trust – The assets in an irrevocable trust may not be taken back by the grantor. Once the grantor has placed the assets into the irrevocable trust the assets become the property of the trust. An irrevocable trust will be subject to taxation under its own tax ID number. Assets placed into an irrevocable trust within three years of the grantor’s death will become property of the grantor’s estate. Assets which have been placed in the irrevocable trust more than 3 years prior to the grantor’s death will not be deemed to be part of the grantor’s estate.
A simple trust – a simple trust is a type of trust established where all income received by the trust must be distributed to the beneficiaries in the year in which the income was received. As a result of the distribution, the income will not be considered taxable income to the trust. The distributions based on the income will become taxable income to the beneficiary.
A complex trust – A complex trust is one that does not require the income to be distributed to the beneficiaries when received by the trust. The income may be retained by the trust and will be considered to be part of the principal or corpus of the trust. Income retained by the trust is subject to substantially higher tax rates than individual income tax rates.
A generation-skipping trust – A generation-skipping trust is established by the grantor to distribute assets to beneficiaries who are more than one generation away from the grantor. For example, a grandparent may establish a generation-skipping trust to distribute assets to their grandchildren. Grandchildren are more than one generation away from a grandparent. As a result of the establishment of a generation-skipping trust, the assets could be subject to a generational skipping tax.
A totten trust – A totten trust Is very similar to a pay on death account. a Totten trust is established at a bank and has a named beneficiary. it is very easy to establish, the assets do not pass through probate and are distributed directly to the named beneficiary. Effectively, an individual would place a named beneficiary on his/ her checking or savings account allowing the account to pass directly to the beneficiary. The owner of the account may change the beneficiaries at any time.
Key Takeaway – make sure you are comfortable with all of the different types of trusts that will appear on your series 65 exam.
What is The difference between present value and future value?
Many test takers will see questions relating to either present value or future value on their exam. The first thing you need to know is that you will not be required to calculate the value mathematically. However, you will be required to understand these terms conceptually. Let’s take a look at a scenario where an individual has $100,000 to invest and wants to know what the $100,000 will grow to when they retire in 20 years. This example is detailing a question where the present value of the investment (or the amount of money the investor has to invest now) is known. What is unknown, is what the value of this money will be in 20 years. To determine what the future value of $100,000 will be in 20 years, one would need to know the annual rate of return and the number of compounding periods during that period of time. The greater the rate of return or interest rate, the higher the future value. Additionally, the greater the number of compounding periods, the greater the future value. If the investor was able to realize an 8% return which compounded annually, the future value would be greater than if the investor was able to realize a 6% return on their investment compounded annually. Likewise, if the investor realized an 8% return on an annualized basis and the interest was compounded quarterly, the future value would be greater than if the investor realized an 8% return on an annualized basis compounded annually. When the interest is compounded quarterly the Investor is being paid interest 4 times per year and is therefore earning interest upon interest more frequently than when interest is only paid once per year, as is the case when interest is compounded annually. Turning now to the concept of present value, we need to look at how to calculate the current value of an amount to be received in the future. For example, let’s say an individual is due to receive a $100,000 distribution from a Family Trust in 10 years. The individual is wondering what the present value of that $100,000 payment is. Certainly the value of $100,000 to be received in 10 years is not worth $100,000 today. The factors that impact the present value of a future payment are the number of years until the payment is received, the interest rate used to discount the value and the number of compounding periods during the period of time. When calculating a present value the higher the interest rate and the greater the number of compounding periods, the lower the present value. For example, the present value of a $100,000 payment to be received in 10 years would be lower when the interest rate used was 8% rather than 6%. Another way to look at this concept is that if interest rates and inflation are high the present value of future payments will be lower.
Key takeaways – make sure that you understand how the value of money can be impacted over time as well as the role of interest rates and inflation on those values.
How do you value an equity security based on cash flow?
Students typically have a little bit of a challenging time with this concept as they tend to want to value securities using more traditional measures of value, Many students will answer this question by using earnings per share or PE ratios. However, the question is asking how do you value an equity security based on cash flow. First, you must realize what they mean by cash flow. The cash flow generated by an equity security is a dividend. The dividend is the cash payment made to investors who own the equity. Valuing an equity security based on cash flow requires the analyst or investor to calculate a current price based on the value of the dividends to be received. There are only two ways to value an equity security based on its dividend and those two valuation methods are the dividend discount model and the dividend growth model. The dividend discount model assumes that the equity is going to pay a fixed dividend in perpetuity and that the dividend will not be changing. The dividend growth model assumes that the dividend will be increasing over time. Many companies have a history of increasing their dividends each year and as such the cash flow to be received by the investor will be increasing as the dividend is raised by the company. It is important to note that the dividend growth model predicts a higher current stock price. Effectively investors will be willing to pay more to receive a dividend that is increasing over time. The dividend growth model would only be used to value shares of common stock. An investor would not use the dividend growth model to value shares of preferred stock because preferred stock pays a stated dividend and it does not increase over time. Do not make this mistake. Internal rate of return may not be used to value an equity security because the calculation requires a maturity date. There is no maturity date for common or preferred stock.
Key takeaways – make sure you understand the difference between the dividend discount model and dividend growth model as ways to value equities based on cash flow
What is the expected return?
The expected return for a security or portfolio is the sum of the weighted value of all potential returns. The weighted value of a potential return, is the return that would be realized based on a particular outcome multiplied by the probability of that outcome taking place. For example, if an investor felt that a portfolio would be up 20% for the year if certain events took place, but the probability of those events taking place was only one in four the Investor would calculate the weighted value of that expected return as follows
20% X 25% = 5%
Because there is only a 25% chance of the events taking place that would lead to the portfolio increasing by 20%, the weighted value of that expectation is 5%. Let’s now expand on this concept and add some additional potential outcomes for our portfolio.
| Performance | Return | Probability | Weighted return |
| Outperform | 20% | 25% | 5% |
| Market perform | 10% | 60% | 6% |
| Underperform | 2% | 15% | .3% |
| Expected return | 11.3% |
Given the potential returns in the above scenario the expected return for the portfolio is 11.3%. The expected return is the sum of all of the weighted returns and when we add up all of the weighted returns we arrive at the expected return of 11.3%.
Key takeaways – make sure that you are comfortable calculating the expected return for a portfolio. This is definitely one of the questions where FINRA can ask you to do math.
What is the rule of 72?
Understanding when to apply the rule of 72 can make some of the most complicated series 65 exam questions easy. The key is to know when to use this simple trick. The rule of 72 would be used when the investor has a sum of money and wants to know how long it will take for that sum to double given a certain rate of return. For example, an investor who has $25,000 to invest knows that he / she can earn 6% per year. The Investor asks the representative how long it will take the money to grow to $50,000. To determine how long it would take the money to double take the interest rate and divide it into 72 as follows: 72 / 6 = 12 years. The series 65 exam may also ask you to calculate the annualized compound rate of return. The key to this question is to notice the relationship between the starting value of an account and the ending value. For example, the question may state that the investor deposited $40,000 into an account 10 years ago and the account is now valued at $80,000. What is the annualized compound rate of return? To determine the annualized compound rate of return simply divide the number of years it took the value of the account to double into 72. 72 / 10 = 7.2. In this case the annualized compound rate of return was 7.2%. One additional thing to be on the lookout for would be if the value of the account quadrupled. Say the investor put $40,000 into their account and now after 10 years is worth $160,000. What happened here was the value of the account doubled twice. In this case you must divide the number of years by 2 to determine the annualized compound rate of return. 72 /5 = 14.4%
key takeaways – the rule of 72 can make the most complicated questions on the series 65 exam easy if you know when to apply the rule. Make sure that you take careful note of the starting Value Inn ending value for any account on your exam.
We hope that this feedback has provided you with additional Insight on how to pass your series 65 exam.
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