Free Series 7 Suitability Practice Questions

Topic summary

Suitability questions are usually customer-first. Identify the customer's objective, risk tolerance, liquidity need, time horizon, tax status, and experience before choosing a product or strategy.

Common traps

• Chasing yield for a customer who needs capital preservation.
• Ignoring liquidity needs when a product is illiquid or long-term.
• Letting the product's return potential override the customer's risk profile.
• Missing account facts such as age, tax bracket, income need, and investment experience.

Free sample questions

1. A retired customer needs current income, low volatility, and access to cash. Which recommendation is generally least suitable? Correct answer: A speculative small-cap growth stock. The customer's profile emphasizes income, liquidity, and low volatility. A speculative growth stock conflicts with those needs.
2. A customer needs funds for a home down payment in six months. Which factor is most important? Correct answer: Short time horizon and liquidity need. A six-month goal puts liquidity and principal stability ahead of long-term growth or illiquid products.
3. A high-tax-bracket customer seeks federally tax-exempt income. Which product may be relevant to evaluate? Correct answer: Municipal bond. Municipal bond interest is generally federally tax exempt, so munis can be relevant for high-tax-bracket income investors.
4. A customer says they cannot tolerate meaningful principal fluctuation. Which profile fact is most directly implicated? Correct answer: Risk tolerance. Risk tolerance measures the customer's ability and willingness to accept volatility or losses.
5. Before recommending an advanced options strategy, which customer fact is especially important? Correct answer: Options approval and experience. Advanced options strategies require an options-approved account and a customer profile that supports the strategy's risk.
6. A customer already has 80% of liquid assets in one technology stock. What concern should a representative address before recommending more of the same stock? Correct answer: Concentration risk. Adding to a large existing position may increase concentration risk, even if the product is otherwise familiar.
7. A conservative customer with limited income asks about margin because a friend uses it. What is the key suitability issue? Correct answer: Borrowing may magnify losses and create calls. Margin creates leverage, interest costs, and possible calls. That may conflict with a conservative profile and limited income.
8. A customer expects to need most invested funds within one year. Which product feature is most concerning? Correct answer: Illiquidity. A near-term cash need makes illiquidity a major concern. The product may not be suitable even if its long-term return profile looks attractive.
9. A customer states that current income is the primary objective. Which recommendation should be questioned most? Correct answer: Non-dividend speculative growth stock. A non-dividend speculative growth stock does not naturally match a current-income objective and may carry higher volatility.
10. A representative recommends a complex product without understanding how it works. Which suitability concept is most directly violated? Correct answer: Reasonable-basis suitability. A representative must have a reasonable basis to believe a recommendation is suitable, which requires understanding the product and its risks.