A customer in his 40s, with ample income to meet his needs, has unexpectedly received $250,000 and would like to invest it in mutual funds. He emphasizes that he is interested in long-term growth and is willing to accept moderate risk. He proposes to his registered representative that the investment be split among three funds: the XYZ Balanced Fund, whose portfolio includes stocks and bonds of many old and successful companies; the KPL Growth and Income Fund, which has shown excellent performance over the last several years; and the NYF International SmallCap Stock Fund, which he feels will provide diversification by investing in foreign companies. In discussing the customer's proposal, the registered representative might make which of the following points?
A) The proposal is suitable, since it provides safety nets: if the U.S. economy does not do well, the foreign investments could take up the slack. If the growth objective is not met, there are also
income investments to provide returns. If small companies do not do well, he is also investing in large companies.
B) The proposal does not address the customer's objective: long-term, moderate-risk growth. Also, by splitting the investment among different fund families, he will probably pay higher sales
C) The proposal appears to be suitable, since it combines safety (old and successful companies) and diversification (debt instruments, foreign stocks, and both small-cap and large-cap
D) The proposal is unsuitable. Since mutual funds are under the control of a fund manager, the customer cannot respond to market and economic changes in a timely fashion.
The correct answer was - B: The proposal does not address the customer's objective: long-term, moderate-risk growth. Also, by splitting the investment among different fund families, he will probably pay higher sales charges.
Explanation: The customer's proposal involves investing in comparatively high-risk, not moderate-risk, small-cap foreign stocks; in debt instruments, which do not provide growth; and in a balanced fund, whose
objective is quite different from the customer's objective: long-term, moderate-risk growth.
Reference: 188.8.131.52 in the License Exam Manual.