Free Series 65 Practice Questions

Which of the following best describes the fiduciary duty that investment advisers owe to their clients?

A) Duty to recommend only proprietary products
B) Duty to act in the client’s best interest at all times
C) Duty to generate the highest possible returns
D) Duty to follow all client instructions without question

Answer: B) Duty to act in the client’s best interest at all times

Explanation: Investment advisers have a fiduciary duty to act in their clients’ best interests at all times. This includes the duty of care (providing suitable advice based on the client’s situation) and the duty of loyalty (putting the client’s interests ahead of the adviser’s own). This fiduciary standard is higher than the suitability standard that applies to broker-dealers.

Study Tip: Remember that fiduciary duty has two main components: duty of care and duty of loyalty. Investment advisers must always prioritize their clients’ interests, even if it means recommending less profitable solutions for the adviser.

An investment adviser with $120 million in assets under management would typically register with:

A) The SEC only
B) The state securities administrator only
C) Both the SEC and state administrators
D) Neither the SEC nor state administrators

Answer: A) The SEC only

Explanation: Investment advisers with $100 million or more in assets under management must register with the SEC. Those with less than $100 million typically register with state securities administrators. The $120 million puts this adviser above the federal threshold, requiring SEC registration only.

Study Tip: Key thresholds to remember: Under $100M = state registration, $100M+ = SEC registration. There are exceptions for advisers in certain states and those with no place of business in a state.

Form ADV Part 2 must be delivered to clients:

A) Only upon client request
B) At least 48 hours before entering into an advisory contract
C) Within 120 days of year-end
D) At the time of entering into an advisory contract or at least 48 hours prior

Answer: D) At the time of entering into an advisory contract or at least 48 hours prior

Explanation: Form ADV Part 2 (the brochure) must be delivered to clients either at the time of entering into an advisory contract OR at least 48 hours before. If delivered less than 48 hours before or at the time of signing, clients have the right to terminate the contract within 5 business days without penalty.

Study Tip: The 48-hour rule gives clients time to review the adviser’s disclosures before committing. If this timing isn’t met, clients get a 5-day “cooling off” period to cancel without penalty.

Which of the following would constitute custody of client funds?

A) Having discretionary trading authority
B) Receiving quarterly management fees via automatic deduction
C) Recommending specific investments to clients
D) Having power of attorney to trade in client accounts

Answer: B) Receiving quarterly management fees via automatic deduction

Explanation: Having the ability to automatically deduct fees from client accounts constitutes custody under the Investment Advisers Act. While this is a limited form of custody, it still requires compliance with custody rules including client notification and qualified custodian arrangements.

Study Tip: Custody can be direct (holding client funds) or constructive (having access to client funds). Automatic fee deduction is the most common form of limited custody for investment advisers.

Updated Form ADV Part 2 must be delivered to existing clients:

A) Annually within 120 days of the adviser’s fiscal year-end
B) Only when material changes occur
C) Quarterly with account statements
D) Upon client request only

Answer: A) Annually within 120 days of the adviser’s fiscal year-end

Explanation: The brochure rule requires investment advisers to deliver updated Form ADV Part 2 to all existing clients annually within 120 days of the adviser’s fiscal year-end. Alternatively, advisers can deliver a summary of material changes and offer to provide the complete brochure.

Study Tip: Remember the annual delivery requirement – 120 days after fiscal year-end. This ensures clients receive updated information about fees, services, and potential conflicts of interest.

When advertising investment performance, investment advisers must:

A) Show only their best-performing accounts
B) Include all accounts in composite calculations
C) Show gross returns before fees
D) Compare performance to the S&P 500 only

Answer: B) Include all accounts in composite calculations

Explanation: Investment advisers must include all accounts managed with substantially similar investment policies in their performance calculations. Cherry-picking only the best-performing accounts would be misleading and violate advertising rules. Performance must be calculated using a fair and balanced methodology.

Study Tip: Performance advertising must be fair, balanced, and not misleading. All similar accounts must be included – no cherry-picking allowed. Consider requiring both gross and net returns for transparency.

For SEC-registered investment advisers, which area is primarily governed by state law?

A) Custody requirements
B) Advertising rules
C) Notice filing and fees
D) Fiduciary obligations

Answer: C) Notice filing and fees

Explanation: While SEC-registered advisers are primarily governed by federal law, states retain authority over notice filing requirements and fees. States cannot impose substantive regulatory requirements on federal advisers but can require notice filings and collect fees for advisers doing business in their state.

Study Tip: Think of it as jurisdictional coordination – SEC handles the substantive regulation, states handle administrative requirements like notice filings and fee collection for advisers operating in their borders.

Which situation represents a conflict of interest that must be disclosed?

A) Recommending diversified mutual funds
B) Earning commissions on insurance products sold to advisory clients
C) Charging annual management fees
D) Meeting with clients quarterly

Answer: B) Earning commissions on insurance products sold to advisory clients

Explanation: Earning commissions on products recommended to advisory clients creates a conflict of interest because the adviser benefits financially from the recommendation. This dual compensation arrangement must be fully disclosed to clients so they understand the adviser’s incentives.

Study Tip: Any situation where the adviser receives additional compensation related to client recommendations creates a conflict that requires disclosure. The key is transparency about all financial incentives.