Product summaries
This summary section highlights the most important test points for the products we’ve covered. As always, tracking each product’s BRTI (benefits, risks, and typical investor) is key to answering suitability questions consistently.
Common stock
- Capital appreciation potential
- Dividend income potential
- Market risk
- Inflation risk (short-term only)
- Business risk
- Financial risk
- Regulatory risk
- Liquidity risk (for unlisted securities)
- Seeks capital appreciation and/or dividend income
- Younger
- Risk tolerant (moderate to aggressive)
- Long term time horizon
Resources: “What is common stock?” video
Preferred stock
- Dividend income
- Capital appreciation if convertible
- Dividends not guaranteed
- Interest rate risk
- Inflation risk
- Call risk
- Reinvestment risk
- Seeks income
- Accepts moderate risk in return for higher income
- Corporate investors (dividend tax exclusion)
- Long term time horizon
General debt securities
- Interest income, which is legally guaranteed
- Interest rate risk
- Inflation risk
- Default risk
- Liquidity risk
- Legislative risk
- Political risk (foreign debt securities)
- Reinvestment risk
- Call risk
- Seeks income
- Generally older
- Risk averse (conservative)
Corporate debt
- Interest income
- Capital gain potential for convertible bonds
- Higher yields (vs. other debt issuers) due to risk
- Variety of choices and risk profiles
- Interest rate risk
- Inflation risk
- Default risk
- Liquidity risk
- Legislative risk
- Political risk
- Reinvestment risk
- Call risk
- Seeks income
- Generally older
- More risk tolerant (than US gov / muni investors)
Certificates of deposit
- Interest income
- FDIC insurance up to $250,000 per bank
- Low yields in exchange for safety
- Interest rate risk (particularly for long-term brokered CDs)
- Willing to accept low yields in exchange for safety
- Typically older or elderly
Municipal debt
- Tax-free interest income for residents
- Typically safe securities
- Low yields (opportunity cost)
- Interest rate risk
- Inflation risk
- Some default risk (although low)
- High liquidity risk
- Reinvestment risk
- Call risk
- Seeks income
- High income / wealthy
- Willing to accept lower yields in exchange for tax benefits :::
US Government debt
- Interest income
- Virtually free of default and liquidity risk
- Generally AAA rated and considered safe
- Seeks income
- Generally older
- Willing to accept lower yields in exchange for safety
Mortgage backed securities
- Monthly income (interest and principal)
- Direct or indirect US government backing
- CMOs offer more predictable outcomes
- Prepayment risk
- Extension risk
- Interest rate risk
- Reinvestment risk
- Inflation risk
- Seeks consistent (monthly) income
- Generally older
- Comfortable with an unknown maturity date
Investment companies
- Instant diversification
- Professional management
- Risk depends on the type of fund
Types of funds
Growth funds
- Seeks capital appreciation
- Invests in common stock
- Higher risk potential
- Higher return potential
- Example: American Funds Growth Fund of America
Growth and income funds
- Seeks capital appreciation and income
- Invests in common stock and preferred stock
- Moderate risk potential
- Moderate return potential
- Example: Vanguard Growth and Income Fund
Value funds
- Seeks capital appreciation and income
- Invests in common stock
- Moderate risk potential
- Moderate return potential
- Example: Thrivent Large Cap Value Fund
Balanced funds
- Seeks capital appreciation and income
- Invests in stocks and bonds
- Moderate risk potential
- Moderate return potential
- Example: T Rowe Price Balance Fund
Income funds
- Seeks income
- Invests in stocks and bonds depending on the type of income fund
- Risk and return potential depend on the type of income fund
- Example: JP Morgan Income Fund
High yield bond funds
- Seeks income
- Invests in speculative (junk bonds)
- Moderate to high risk potential
- Moderate to high return potential
- Example: Blackrock High Yield Bond Fund
Conservative bond funds
- Seeks income
- Invests in investment grade bonds
- Low risk potential
- Low return potential
- Example: Fidelity Conservative Bond Fund
MBS agency funds
- Seeks income from mortgages
- Invests in MBS from Ginnie Mae, Fannie Mae, Freddie Mac
- Moderate to low risk potential
- Moderate to low return potential
- Example: PIMCO GNMA and Government Securities Fund
Asset allocation funds
- Various asset mixes
- Asset mix may be static or fluid
- Example: Franklin Moderate Allocation Fund
Life cycle funds
- Type of asset allocation fund
- Asset mix becomes more conservative over time
- Example: State Street Target Retirement 2050 Fund
Money market funds
- Seeks preservation of capital
- Small income potential
- Invests in debt securities with one year or less to maturity
- Very low risk
- Very low return potential
- Example: Charles Schwab Value Advantage Money Fund
Specialized funds
- Invests in securities from specific industries or regions
- Moderate to high risk potential
- Moderate to high return potential
- Example: Morgan Stanley India Investment Fund
Sector funds
- Invests in securities from specific industries
- Moderate to high risk potential
- Moderate to high return potential
- Example: Fidelity Select Pharmaceuticals Portfolio
Real estate investment trusts (REITs)
- Equity REITs provide capital appreciation
- Mortgage REITs provide income
- Hybrid REITs provide capital appreciation and income
- Provide real estate diversification
- Unlisted and private REITs subject to liquidity risk
- Real estate may hedge against stock market risk
Hedge funds
- High liquidity risk
- High risk and return potential
- Suitable only for wealthy, aggressive investors
Direct participation programs (DPPs)
- High liquidity risk
- Tax benefits (losses passed through)
- Moderate to high risk and return potential