Study guide
7.1 Types of Clients
Series 66 Uniform Combined State Law
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1 Introduction
About the Series 66 How to Use This Guide
2 Chapter 1: Economic Factors and Business Information
1.1 Financial Ratios and Valuation 1.2 Time Value of Money 1.3 Descriptive Statistics and Risk Measures
3 Chapter 2: Cash and Fixed Income Securities
2.1 Cash and Cash Equivalents 2.2 Fixed Income Securities Basics 2.3 Types of Bonds 2.4 Bond Risks and Duration
4 Chapter 3: Equity Securities
3.1 Common Stock 3.2 Preferred Stock 3.3 Equity Valuation Methods 3.4 Public Offerings and IPOs
5 Chapter 4: Pooled Investments
4.1 Mutual Funds 4.2 ETFs and Unit Investment Trusts 4.3 REITs and Direct Participation Programs
6 Chapter 5: Insurance Products and Annuities
5.1 Life Insurance Products 5.2 Annuities
7 Chapter 6: Alternative Investments and Derivatives
6.1 Alternative Investments 6.2 Options Basics 6.3 Structured Products and Complex Investments
8 Chapter 7: Client Types and Profiles
7.1 Types of Clients 7.2 Building Client Profiles
9 Chapter 8: Portfolio Theory and Management
8.1 Modern Portfolio Theory 8.2 Asset Allocation Strategies 8.3 Measuring Portfolio Performance
10 Chapter 9: Retirement Plans
9.1 Qualified Retirement Plans 9.2 Individual Retirement Accounts 9.3 ERISA and Fiduciary Obligations
11 Chapter 10: Tax Considerations and Estate Planning
10.1 Investment Taxation 10.2 Estate Planning Basics 10.3 Special Accounts (Education and Health)
12 Chapter 11: Investment Adviser Regulation
11.1 Investment Adviser Definition 11.2 Investment Adviser Registration 11.3 Investment Adviser Representative Registration
13 Chapter 12: Broker-Dealer and Securities Regulation
12.1 Broker-Dealer Definition and Registration 12.2 Securities Registration 12.3 Administrative Provisions and Remedies
14 Chapter 13: Ethical Practices and Fiduciary Obligations
13.1 Fiduciary Duty 13.2 Prohibited and Unethical Practices 13.3 Custody and Safeguarding Client Assets
15 Chapter 14: Client Communication and Business Practices
14.1 Advertising and Client Communications 14.2 Advisory Contracts 14.3 Cybersecurity and Privacy
16 Chapter 15: Suitability and Best Interest Standards
15.1 Suitability Obligations 15.2 Best Execution 15.3 Account Management and Supervision
7.1 Types of Clients
Key Takeaways Explain This Topic AI
Individual clients vary by goals, time horizon, risk tolerance, and tax situation.
The GRANTOR creates and funds a trust; the TRUSTEE manages it; BENEFICIARIES receive the benefits.
Revocable trusts can be modified by the grantor but do NOT avoid estate taxes.
Irrevocable trusts CANNOT be changed but DO avoid estate taxes on transferred assets.
Estates are temporary entities to settle a deceased person's affairs.
Private foundations must distribute at least 5% of assets annually for charitable purposes.
2024 estate tax exemption is $13.61 million; gift tax annual exclusion is $18,000.
Different client types have different liquidity needs, time horizons, and tax considerations.
Last updated: January 2026
Investment advisers work with various client types, each with unique needs, legal requirements, and investment considerations. Understanding these differences is essential for making suitable recommendations.
Individual Clients
Individual clients are the most common type and have the widest variety of needs.
Key Factors to Consider
Factor Considerations Questions to Ask
Goals Retirement, education, home purchase, wealth transfer What are you saving for?
Time Horizon Short (<3 years), medium (3-10), long (10+) When will you need the money?
Risk Tolerance Conservative to aggressive How would you react to a 20% loss?
Tax Situation Tax bracket, state taxes, tax-advantaged accounts What is your marginal tax rate?
Liquidity Needs Emergency funds, anticipated expenses How much cash do you need access to?
Net Worth Assets minus liabilities What are your assets and debts?
Life Stage Considerations
- Life Stage Typical Characteristics Investment Focus
- Young Professional Long time horizon, high risk capacity Growth, aggressive allocation
- Mid-Career Building wealth, family obligations Balanced, diversification
- Pre-Retirement Shorter horizon, preservation focus Income, moderate risk
- Retirement Income needs, legacy planning Income, capital preservation
- Trusts
A trust is a legal arrangement where one party holds assets for the benefit of another.
Key Trust Parties
- Party Role Responsibilities
- Grantor (Settlor/Trustor) Creates and funds the trust Determines trust terms, beneficiaries
- Trustee Manages the trust Fiduciary duty to beneficiaries
- Beneficiaries Receive trust benefits Current (income) or remainder (principal)
- Types of Trusts
Type Characteristics Tax Treatment
Revocable Living Trust Grantor can modify or revoke; avoids probate Income taxed to grantor; included in estate
- Irrevocable Trust Cannot be changed once established Removes assets from grantor's estate
- Testamentary Trust Created by will; takes effect at death Subject to probate; taxed as estate asset
Charitable Remainder Trust Provides income to donor, remainder to charity Immediate tax deduction; income taxable
- Charitable Lead Trust Charity receives income, remainder to heirs Reduces gift/estate taxes
- Revocable vs. Irrevocable Trusts
- Feature Revocable Irrevocable
- Can be modified Yes No
- Avoids probate Yes Yes
- Avoids estate taxes No Yes
- Asset protection No (still grantor's property) Yes
- Income taxation Taxed to grantor Taxed to trust or beneficiary
- Gift tax at creation No (no completed gift) Yes (completed gift)
- Trust Investment Considerations
- Consideration Description
- Prudent Investor Rule Must invest with care, skill, and caution
- Diversification Generally required unless imprudent
- Income vs. Growth Balance needs of income and remainder beneficiaries
- Fiduciary Duty Trustee must act solely in beneficiaries' interests
- Trust Terms Follow specific instructions in trust document
Exam Tip : Revocable trusts do NOT avoid ESTATE taxes (assets still in grantor's estate). Irrevocable trusts DO avoid estate taxes because the grantor gave up ownership.
Estates
An estate is a temporary legal entity created to settle a deceased person's affairs.
Estate Administration
- Aspect Details
- Time Horizon Short-term (typically 6 months to 2 years)
- Goals Preserve value, pay debts/taxes, distribute assets
- Investment Approach Conservative, preserve capital
- Executor/Administrator Personal representative managing the estate
- Probate Court process to validate will and distribute assets
- Testate vs. Intestate
- Term Definition Process
- Testate Died WITH a valid will Will directs distribution
- Intestate Died WITHOUT a valid will State law determines distribution
- Estate Tax Thresholds (2024)
- Tax Threshold
- Federal Estate Tax Exemption $13.61 million
- Federal Gift Tax Annual Exclusion $18,000 per recipient
- Federal Gift Tax Lifetime Exemption $13.61 million
- Top Estate Tax Rate 40%
Exam Tip : Estate investments should be CONSERVATIVE and LIQUID because the estate needs to pay taxes, debts, and distribute assets quickly.
Business Entities
Different business types have different investment needs.
Corporate Clients
- Need Investment Approach
- Operating Cash Short-term, liquid investments
- Pension Obligations Long-term, liability-matching
- Excess Cash Based on corporate objectives
- Restricted Accounts As required by agreements
- Other Business Types
- Type Key Considerations
- Partnership Partner capital accounts, operating needs
- LLC Flexibility in structure and taxation
- Sole Proprietorship Owner's personal situation intertwined
- Non-Profit Mission-driven, spending requirements
- Foundations and Charities
- Private Foundations
- Requirement Details
- 5% Distribution Rule Must distribute at least 5% of investment assets annually
- Tax Status Tax-exempt (501(c)(3))
- Time Horizon Usually perpetual
- Investment Restrictions May have socially responsible mandates
- Jeopardizing Investments Excess business holdings and certain investments prohibited
- Public Charities
- Characteristic Description
- Funding Source Broad public support
- Distribution No minimum requirement
- Tax Advantages Generally more favorable than private foundations
- Oversight Less restrictive than private foundations
- Endowments
- Feature Details
- Purpose Permanent fund to support organization
- Spending Policy Typically 4-5% of average assets
- Investment Goal Growth to maintain purchasing power after spending
- Time Horizon Perpetual
Exam Tip : Private foundations must distribute at least 5% of investment assets annually for charitable purposes. This is a key testable point.