Packaged Products — Quick Reference

Core Concepts at a Glance

• NAV calculated once daily at 4:00 PM ET (open-end mutual funds only)

• ETFs trade intraday at market prices; mutual funds price at end-of-day NAV

• REIT must distribute ≥90% of taxable income to maintain pass-through tax status

• REIT dividends = ordinary income (NOT qualified dividends)

• Variable annuity = securities product (requires Series 6/7 + state insurance license)

• Fixed annuity = insurance product only (state insurance license sufficient)

• Variable annuity assets held in separate account (protected from insurer insolvency)

• Leveraged/inverse ETFs designed for SHORT-TERM use only — volatility decay destroys long-term returns

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NAV and POP Formulas

NAV = (Total Assets − Total Liabilities) ÷ Shares Outstanding POP = NAV ÷ (1 − Sales Load %) Example: NAV = $10.00, load = 5% → POP = $10.00 ÷ 0.95 = $10.53 Sales Load % = (POP − NAV) ÷ POP — note: denominator is POP, not NAV ---

Load Type Comparison

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ETF vs. Mutual Fund Key Differences

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Breakpoint Schedule (Typical)

|---|---| Letter of Intent: 13-month window to commit to a breakpoint level (not 12 — common trap) Rights of Accumulation: Existing holdings count toward breakpoint threshold for new purchases Breakpoint selling: Recommending amounts just below a breakpoint to earn higher commissions = FINRA violation ---

REIT Rules Summary

|---|---| Equity REIT → owns properties → rental income Mortgage REIT (mREIT) → owns mortgages/MBS → interest income → highly rate-sensitive Non-traded REIT → SEC-registered, not exchange-listed → illiquid, high fees, suitability concerns ---

Variable Annuity Summary

|---|---|---|

Feature	Class A	Class B	Class C
Front-end load	Yes (reduced at breakpoints)	None	None
Back-end load (CDSC)	None	Yes (declining, ~5–7 years)	Small or none
12b-1 fee	Low (~0.25%)	Moderate (0.75–1%)	High (~1%)
Converts to Class A	N/A	Yes (typically year 7–8)	No
Best for	Large, long-term investment	Medium-term holding	Short-term holding
Breakpoints apply	Yes	No	No
Feature	ETF	Open-End Mutual Fund
Trading	Intraday at market price	Once daily at end-of-day NAV
Order types	Market, limit, stop, short	Buy/sell at NAV only
Minimum investment	Cost of 1 share	Often $500–$3,000
Expense ratio	Generally lower	Generally higher
Tax efficiency	High (in-kind creation/redemption)	Lower (cash redemptions trigger cap gains)
Short selling	Yes	No
Margin eligible	Yes	No
Creation/redemption	Authorized participants, in-kind	Direct with fund company, cash
Amount Invested	Load
$0 – $24,999	5.00%
$25,000 – $49,999	4.50%
$50,000 – $99,999	3.75%
$100,000 – $249,999	3.25%
$250,000+	2.00%
Requirement	Detail
Minimum distribution	90% of taxable income annually
Tax benefit	No corporate income tax on distributed amount
Dividend tax treatment	Ordinary income (investor's marginal rate) — NOT qualified dividends
Asset test	75%+ of assets must be real estate
Income test	75%+ of gross income from real estate sources
Shareholder test	≥100 shareholders; no 5 people can hold >50%
Phase	Unit Type	What Fluctuates
Accumulation	Accumulation units	Value per unit (subaccount performance)
Annuity (payout)	Annuity units (fixed count)	Dollar payment per unit

Payout Options

• Life only → Highest payment; stops at annuitant's death; insurer keeps remainder

• Life + period certain → Continues to beneficiary if annuitant dies within the guaranteed period

• Joint and survivor → Covers two lives; lowest payment

Tax Rules (Non-Qualified Annuity)

• LIFO → Earnings come out first → taxed as ordinary income

• Principal comes out last → tax-free (return of cost basis)

• Under 59½ withdrawal → ordinary income tax on earnings + 10% penalty

Suitability Red Flags

• Inside an IRA or 401(k) — tax deferral already provided; VA fees add no benefit

• Customer over age 75 — limited time horizon for surrender charge burn-off

• Near-term liquidity needs — surrender charges typically apply for 6–8 years

• Low tax bracket — tax deferral benefit is minimal

• 1035 exchange not clearly in customer's best interest

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Common Exam Traps

• NAV formula: Subtract liabilities BEFORE dividing — never skip this step

• POP formula: Load divides into POP (not NAV) as denominator — don't flip it

• Breakpoint selling: Recommending amounts just below a breakpoint = FINRA violation

• REIT dividends: Ordinary income, NOT qualified dividends — the most common REIT trap

• VA inside an IRA: Almost never suitable — IRA already provides tax deferral

• Leveraged ETFs long-term: Not suitable for buy-and-hold; volatility decay causes underperformance vs. stated multiple

• Class C shares: Never convert to Class A; Class B eventually does

• Variable annuity license: Requires BOTH securities (S6/S7) AND state insurance license

• Non-traded REIT: SEC-registered but NOT exchange-traded — major illiquidity risk

• Letter of Intent period: 13 months (NOT 12 months)

• Fixed vs. variable annuity: Fixed → general account → insurance product only; Variable → separate account → securities product