Common Mistakes to Avoid
Watch out for these exam traps that candidates frequently miss on Characteristics of Pooled Investments questions:
Forgetting ETFs trade intraday while mutual funds trade at end-of-day NAV
Not understanding 12b-1 fee limitations
Confusing Class A, B, and C share structures
Sample Practice Questions
A mutual fund has total assets of $500 million, total liabilities of $20 million, and 40 million shares outstanding. What is the NAV per share?
B is correct. NAV is calculated as (Total Assets - Total Liabilities) ÷ Shares Outstanding. In this case: ($500 million - $20 million) ÷ 40 million shares = $480 million ÷ 40 million = $12.00 per share.
A ($11.50) is incorrect because it uses an incorrect calculation. C ($12.50) is incorrect and appears to divide assets by shares without subtracting liabilities. D ($13.00) is incorrect and may result from dividing total assets by shares outstanding without accounting for liabilities.
NAV calculation is one of the most frequently tested concepts for pooled investments on the Series 65. Understanding this formula is essential because NAV determines the price at which investors buy and redeem mutual fund shares. The exam often presents calculation questions to test whether you can correctly apply the formula. Remember that NAV is calculated daily at market close (4 PM ET) and forms the basis for forward pricing in open-end funds.
What is the maximum annual 12b-1 fee that a mutual fund can charge and still call itself a "no-load" fund?
D is correct. A mutual fund can charge up to 0.25% in 12b-1 fees and still call itself a "no-load" fund. Any 12b-1 fee above 0.25% means the fund cannot use the "no-load" designation.
A (1.00%) is incorrect because while this is the maximum total 12b-1 fee allowed (0.75% distribution + 0.25% service), funds charging this amount cannot call themselves no-load. B (0.00%) is incorrect because funds can charge up to 0.25% and still be considered no-load. C (0.75%) is incorrect because this is the maximum distribution fee component of 12b-1 fees, but exceeds the no-load threshold.
Understanding 12b-1 fee limitations is critical for the Series 65 exam and for providing proper advice to clients. This is a common exam trap where test-takers assume "no-load" means zero fees, when actually it means no sales load plus 12b-1 fees of 0.25% or less. The distinction matters when comparing fund costs and determining which share class is most appropriate for a client. Be alert for questions that try to trick you into thinking any 12b-1 fee disqualifies a fund from being called no-load.
A client is choosing between mutual fund share classes. Which share class typically has the lowest ongoing expenses and is most suitable for long-term investors making large investments?
A is correct. Class A shares typically have a front-end load but the lowest ongoing expenses (lower 12b-1 fees and operating expenses), making them most cost-effective for long-term investors, especially those making large purchases that qualify for breakpoint discounts.
B (Class B shares) is incorrect because they have higher ongoing 12b-1 fees (up to 1.00%) and are designed with a back-end load (CDSC). Many fund families have eliminated Class B shares. C (Class C shares) is incorrect because they have higher ongoing expenses (1.00% 12b-1 fees) and are better suited for shorter holding periods. D (Class I shares) is incorrect because while they have the lowest expenses and no load, they are reserved for institutional investors with very high minimum investments, not typical retail clients.
Share class selection appears frequently on the Series 65 exam and is a practical suitability question advisers face regularly. Understanding the fee structures helps you recommend the most cost-effective option based on investment amount, time horizon, and client type. The exam often tests whether you can match share classes to investor profiles. Long-term investors benefit from Class A's lower ongoing costs despite the upfront load, especially with breakpoint discounts on larger purchases.
Which of the following statements about Contingent Deferred Sales Charges (CDSC) is correct?
C is correct. CDSC (back-end load) charges typically decline over time, often starting at 5-6% and decreasing by 1% per year until reaching zero after 6 to 8 years. This declining structure incentivizes longer holding periods.
A (charged at purchase) is incorrect because CDSC is a back-end load charged at redemption, not at the time of purchase. B (Class A only) is incorrect because CDSC is associated with Class B shares (and sometimes Class C for the first year), not Class A shares which have front-end loads. D (increase over time) is incorrect because CDSC charges decline, not increase, encouraging investors to hold shares longer.
Understanding CDSC mechanics is important for the Series 65 because it affects suitability recommendations and client cost analysis. The exam frequently tests whether you understand the difference between front-end loads (Class A) and back-end loads (CDSC in Class B). Knowing that CDSC declines over time helps you advise clients on when it might make sense to hold versus redeem shares. Class B shares often convert to Class A after the CDSC period ends, giving investors the benefit of lower ongoing expenses.
An investor places an order to purchase shares of an open-end mutual fund at 2:00 PM Eastern Time. At what price will the order be executed?
D is correct. Open-end mutual funds use forward pricing, meaning all orders received during the trading day are executed at the NAV calculated at 4:00 PM ET (market close) that same day, regardless of when during the day the order was placed.
A (previous day's NAV) is incorrect because orders are filled at the next calculated NAV, which for an order placed at 2:00 PM would be that day's 4:00 PM NAV, not the prior day's price. B (average NAV) is incorrect because mutual funds use a single daily NAV, not an average. C (NAV at 2:00 PM) is incorrect because mutual funds only calculate NAV once per day at market close, not continuously throughout the day.
Forward pricing is a fundamental characteristic that distinguishes mutual funds from other investments and appears regularly on the Series 65 exam. Understanding this concept helps you explain to clients why they cannot know their exact purchase price when placing an order during the trading day. This is a critical difference from stocks and ETFs, which trade at real-time market prices throughout the day. The exam often contrasts mutual fund forward pricing with ETF intraday trading to test if you understand the distinction.
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Investment products make up the largest section of the Series 65. CertFuel targets the specific distinctions between bonds, stocks, funds, and alternatives that appear most often.
Access Free BetaWhich of the following statements correctly describes a key trading difference between ETFs and mutual funds?
D is correct. ETFs trade throughout the trading day on exchanges at market-determined prices (intraday pricing), while open-end mutual funds trade only at the end of the day at the calculated NAV (forward pricing at 4:00 PM ET).
A (both trade with fund company) is incorrect because only mutual funds are bought and sold directly with the fund company, while ETFs are traded on exchanges between investors, just like stocks. B (reversed roles) is incorrect because it has the trading mechanisms backwards. C (both use forward pricing) is incorrect because only mutual funds use forward pricing, while ETFs trade continuously at market prices.
This is the #1 most commonly confused distinction about pooled investments and appears frequently on the Series 65 exam. Understanding the trading mechanism difference is essential for suitability recommendations. ETFs offer intraday liquidity and the ability to use limit orders, stop orders, margin, and short selling. Mutual funds offer simplicity and the certainty of getting that day's closing NAV. The exam often presents scenarios asking which vehicle is appropriate for different client needs, testing whether you grasp these fundamental operational differences.
A mutual fund offers a breakpoint discount at $25,000. An investor is purchasing $24,000 of the fund. If the registered representative suggests purchasing only $24,000 to avoid reaching the breakpoint, this is known as:
B is correct. Breakpoint selling is a serious violation where a registered representative fails to inform a client about available breakpoint discounts or discourages the client from investing enough to qualify for a lower sales charge. Recommending $24,000 when $25,000 would trigger a discount harms the client and violates industry rules.
A (proper practice) is incorrect because this is actually an unethical and prohibited practice that harms clients. C (LOI violation) is incorrect because a Letter of Intent is a separate mechanism for achieving breakpoints over time, not the violation occurring here. D (ROA abuse) is incorrect because Rights of Accumulation refers to combining existing holdings to reach breakpoints, not the specific violation of selling just below a breakpoint threshold.
Breakpoint violations are heavily tested on the Series 65 because they represent a fundamental breach of fiduciary duty and ethical obligations. Understanding what constitutes breakpoint selling helps you recognize prohibited practices and protect clients. The exam may present scenarios where a representative's actions seem to help a client but actually deprive them of discounts they've earned. Always remember that advisers must inform clients of available breakpoints and suggest investments that qualify for the best pricing. This is not optional, it's a regulatory requirement.
An investor currently owns $40,000 of ABC mutual fund shares and wants to purchase an additional $15,000. The fund offers breakpoints at $25,000, $50,000, and $100,000. Under Rights of Accumulation (ROA), which breakpoint applies to the new purchase?
C is correct. Rights of Accumulation (ROA) allows investors to combine the current NAV of existing holdings with new purchases to reach breakpoint thresholds. The $40,000 existing holdings plus $15,000 new purchase totals $55,000, which qualifies for the $50,000 breakpoint discount on the new shares.
A (no breakpoint) is incorrect because ROA specifically exists to combine prior holdings with new purchases to achieve breakpoint discounts. B ($25,000 breakpoint) is incorrect because the combined total of $55,000 qualifies for the higher $50,000 breakpoint, giving the investor a better discount. D ($100,000 breakpoint) is incorrect because the combined total is only $55,000, not high enough to reach the $100,000 threshold.
Rights of Accumulation questions appear regularly on the Series 65 exam because they test your understanding of how breakpoints actually work in practice. This concept is important for client service because many investors don't realize their existing holdings count toward breakpoint thresholds. Understanding ROA helps you provide better advice and ensure clients receive all discounts they've earned. The exam may test whether you know to use current NAV (not original purchase price) of existing holdings when calculating ROA eligibility.
An investor signs a Letter of Intent (LOI) to purchase $50,000 of a mutual fund within 13 months to qualify for a breakpoint discount. After 13 months, the investor has only purchased $45,000. What happens?
B is correct. When an investor fails to meet the Letter of Intent commitment, the fund retroactively charges the higher sales load that would have applied without the breakpoint discount. The fund typically holds shares in escrow and liquidates enough to cover the additional sales charge owed.
A (automatic extension) is incorrect because LOI periods are not automatically extended. The investor received the breakpoint discount upfront but must now pay the difference if they didn't fulfill the commitment. C (must purchase remaining amount) is incorrect because there is no requirement to complete the purchase, only a financial consequence for not doing so. D (forfeits all shares) is incorrect because the investor keeps their shares but pays additional sales charges to reflect the actual purchase amount.
Letter of Intent mechanics are tested frequently on the Series 65 because they involve specific regulatory requirements and client obligations. Understanding the consequences of not fulfilling an LOI is important for setting proper client expectations. The exam often tests whether you know that LOI gives immediate breakpoint benefits but creates an obligation to invest the committed amount within 13 months. Also remember that LOI can be backdated 90 days to include recent purchases, another detail the exam may test.
A mutual fund has a Public Offering Price (POP) of $10.80 and a Net Asset Value (NAV) of $10.00. What is the sales load percentage?
A is correct. Sales load percentage is calculated as (POP - NAV) ÷ POP, not divided by NAV. The calculation is ($10.80 - $10.00) ÷ $10.80 = $0.80 ÷ $10.80 = 0.0741 or 7.41%.
B (8.00%) is incorrect because it incorrectly divides the $0.80 difference by the NAV ($10.00) instead of by the POP. This is a common mistake. C (8.50%) is incorrect and may represent a guess based on knowing the maximum load is 8.5%. D (10.00%) is incorrect and does not reflect any proper calculation of sales load percentage.
Sales load calculations appear regularly on the Series 65 exam and trip up many test-takers who divide by NAV instead of POP. Understanding this calculation is essential because it determines the actual cost investors pay for mutual fund shares. Remember the formula: POP = NAV + Sales Load, and sales load percentage is always calculated as (POP - NAV) ÷ POP. The maximum allowable front-end load is 8.5%, so any calculation showing more than 8.5% should signal an error. This type of math question tests both your calculation skills and your understanding of mutual fund pricing.
Key Terms to Know
Net Asset Value (NAV)
The per-share value of a fund calculated by dividing total assets minus liabilities by shares outstanding. Mutual funds ...
Expense Ratio
The annual fee charged by a mutual fund or ETF, expressed as a percentage of average net assets. Includes management fee...
12b-1 Fees
Annual marketing and distribution fees charged by mutual funds, named after SEC rule 12b-1. Limited to 0.25% for no-load...
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