Welcome to Portfolio Risk and Product Disclosures, the unit that shifts from whether one recommendation is suitable to what a customer's whole portfolio is exposed to, plus the cost and hold disclosures a firm owes on top of that.
Exam Weight: 4 scored items within Function 3 (13 items / 26% of exam)
What You'll Learn
In this unit, you'll cover:
- Purchasing Power Risk and Balanced Portfolio Construction: how inflation erodes fixed-dollar income, and why a mix of bonds, preferred stock, common stock, and convertibles pursues downside protection and an inflation hedge together
- Marketability and Liquidity Needs: how easily a security can be sold without a price concession, and how that differs from how soon a customer needs cash
- Taxability and the Customer's Tax Bracket: how corporate, government, and municipal income is taxed, and why a municipal bond only outperforms after tax once the bracket is high enough
- Callability and Call Protection: why issuers call securities, and what a call protection period is worth to an income-dependent customer
- Convertibility and Forced Conversion: how a convertible security's conversion feature works, and why a call can force a rational holder into common stock
- Maturity Schedules and Laddering: how maturity length trades price risk for reinvestment risk, and how laddering spreads that trade-off across time
- Reasonable and Non-Discriminatory Service Charges: the standard that governs ancillary fees such as safekeeping and transfer charges
- Temporary Holds for Financial Exploitation of Specified Adults: who a firm may place a hold for, the notification clock, and how the hold period can extend in stages
- Disclosing What a Transaction Really Costs: when a confirmation must show the firm's mark-up or mark-down in dollars and as a percentage
Why This Matters
A recommendation that clears suitability at the trade level can still leave a customer overexposed at the portfolio level: too much purchasing power risk, an illiquid position bought with money the customer needs soon, or a bond held past the point where a call was foreseeable.
This unit also covers the disclosures that make a portfolio's real cost visible and the duties a firm has toward a vulnerable customer.
A specified adult relies on the temporary-hold rule to slow down a theft in progress. Every customer relies on the service-charge standard to keep ancillary fees reasonable. The mark-up disclosure reaches a much narrower set of principal debt trades, and shows that customer what the trade really cost.
Let's start with purchasing power risk and balanced portfolio construction.