Seven tips for acing the Series 7 and other financial exams

Success in the General Securities Representative Exam, more commonly known as Series 7, is fundamental to anyone wishing to work in the investment industry in the United States. Before you can sell securities, you need to pass the test. Fail, and you could lose your job – the pressure is on.

The good new is that – unlike the CFA exams where only 46% of candidates make the grade – around 65% of those taking the Series 7 pass. But there’s clearly still room to falter.

We spoke to Brian Marks, managing director of New York-based FINRA Licensing Exam preparation firm, Knopman Marks Financial Training, on what it takes to make it through the Series 7 exams.

1. Put the time in

If the CFA requires 300 hours of study for every level, the recommended prep time for the Series 7 exam – assuming you’re new to the industry – is 80-100 hours. This should mean not only consuming the relevant textbooks, but undertaking at least 1,000 practice questions and taking live exams so you can gain an understanding of the pressure you’ll be under on the day.

2. Think concepts, not questions

You will skip questions during any practice exams, but don’t panic and don’t assume that individual questions will crop up anyway. The key, says Marks, is to learn concepts rather than rely on your memory: “People try brute force to memorize formulas rather than understanding the concepts. If your memory fails on the exam, there is no backup,” he says.

3. Don’t spend time on the more technical subjects

In every financial exam, there are topics that necessitate more study than others, largely because of their complex nature. In the Series 7, a lot of candidates are guilty of spending way too much time on the options and corporate bonds sectors. “These two topics account for about 20% of the exam,” says Marks.

4. Know the bell curve rule

There are two facts to consider when you’re pondering how much time to spend on each question. Firstly, there are 260 questions in the Series 7 exams but only 250 count. The remaining 10 are experimental questions used by FINRA to help improve the test in the future. So, don’t freak out if you see a question on an unfamiliar topic, this can put you off other questions. Secondly, there’s a bell curve approach to the exam – the first and last 25 questions are the easiest, so don’t panic if it suddenly gets more difficult.

5. Train for what you’re getting yourself into

The Series 7 exam is six hours long and consists of 260 questions. It’s a beast. There’s a reason you need to immerse yourself into practice exams rather than simply bite-sized study chunks – you need to train like an athlete to get your mind and body used to this marathon period of time.

6. Make sure you’re study material is up to date

This sounds like a small thing, but out-of-date study material means that you’ve pretty much missed the boat. This is particularly the case as regulators change the rules ever more swiftly.

Marks gives the example of the JOBS Act, passed by Congress years ago, but which has amendments under Regulation A due to come into effect on June 19 2015. FINRA will expect candidates to be up to speed.

“FINRA will also heavily weight questions on topics that have been the subject of abuses by industry personnel,” he says. “Examples include variable annuity sales to senior citizens and sales of structured products to less sophisticated investors.”

7. Go above and beyond

You need 72% to pass the Series 7 exams, but confidence is key. Realistically, you need to be hitting 80% in the practice exams to go into the day knowing you can pass. The bigger the margin for error, the better.

Handy hint: The hardest Series 7 questions, with expert answers

Marks provided these two questions, which he says are among the toughest in the Series 7 exam.

1. Variable annuities have investment features similar to mutual funds. Which of the following is not a characteristic of a variable annuity?

a. Tax-free distributions once retirement age is reached

b. Payout options that can deliver income over an investor’s life

c. Death benefits

d. Tax-deferred treatment of earnings

Answer: A. Variable annuities generally offer tax treatment similar to a corporate retirement plan, with after-tax contributions, tax-deferred growth, and distributions that are taxes as ordinary income.

2. In January, an investor opens an options position by purchasing 3 ABC March 30 calls and by selling 3 ABC March 40 calls. This position is a:

a. Debit spread

b. Credit Spread

c. Long Straddle

d. Short Straddle

Answer: A. An investor who buys and sells the same class of option (e.g. calls) on the same security is establishing a spread. In a debit spread, the customer pays a net premium. This position is a debit because the 30 call will have more intrinsic value, and therefore carry the greater premium.