The Mistakes That Cost Candidates Marks in Every Section, and How to Spot Each Trap

The most common Series 65 mistake is treating it as a memory test. The exam rarely asks whether you have heard of a rule; it asks whether you can apply it when the question is worded to catch you out, and most lost marks come from a small set of traps that repeat across every section.

This guide walks through those traps section by section, following the four parts of the NASAA exam outline, with the reason candidates fall for each one and how to avoid it. It also covers the test-taking mistakes that cost marks even when you know the material, and answers the questions candidates ask most about the exam itself.

Preparing for your exam? Watch FRC’s Series 65 playlist on YouTube, with exam traps called out in every topic.

How the Series 65 Is Built

The Series 65, the Uniform Investment Adviser Law Examination, is written by NASAA and administered by FINRA. It has 130 scored questions plus 10 unscored pretest questions, you have 180 minutes, and you need 92 correct answers out of 130 to pass.

No firm sponsorship is required, so anyone can register and sit it. The scored questions are split across four sections, and the traps in each section look different.

Where to Start Your Preparation

Traps are easiest to beat when you have studied each topic in a structured order rather than collecting facts at random. FRC’s Series 65 Exam Preparation course covers all four sections of the exam outline, with exam traps flagged topic by topic.

If you are also heading toward a broker-dealer role, the SIE Examination Preparation course covers the industry foundations that many Series 65 questions build on. Every FRC course can be spread across interest-free monthly payments, so cost is no reason to put off your exam date.

How the Exam Builds a Trap

Before looking at individual topics, it helps to know the techniques the question writers use again and again. The first is the qualifier: words like EXCEPT, NOT, LEAST and FIRST reverse or narrow what the question is asking, and candidates who skim answer the opposite question.

The second is the absolute. Answer choices built on “always,” “never” or “all” are often wrong, because most rules on this exam have exceptions, such as performance fees being prohibited except with qualified clients.

The third is the near-miss number, where two answers differ only by a holding period, a dollar threshold or a day count. The fourth is the swapped label, where a correct definition is attached to the wrong term, such as describing the Treynor ratio and calling it Sharpe.

The fifth is the distractor, a detail in the scenario that has nothing to do with the answer, such as a client’s hobbies or a company executive’s background. The sixth is the Roman numeral question, where you must judge each statement on its own, cross out the false ones and only then look at the combinations.

Section One: Economic Factors and Business Information

Trap 1: The Inverted Yield Curve

A normal yield curve slopes upward, with long-term rates above short-term rates. An inverted curve slopes downward, with short-term rates above long-term rates, and it has historically been read as a warning that markets expect an economic slowdown.

The mistake is mixing up which rates sit higher. FRC’s guide to normal vs inverted yield curves explains each shape and what it signals.

Trap 2: Who Controls Monetary and Fiscal Policy

Monetary policy is run by the Federal Reserve through interest rates, open market operations and reserve requirements. Fiscal policy is set by Congress and the President through taxation and government spending.

Questions often describe a tax cut and ask which tool it represents, or describe a Fed rate change and offer fiscal policy as an answer. The guide to monetary policy vs fiscal policy separates the two clearly.

Trap 3: Stagflation Is Not Just a Recession

A recession is a decline in economic activity. Stagflation combines slow growth and high unemployment with rising inflation, which is unusual because inflation normally eases when the economy weakens.

The mistake is choosing recession when the question mentions rising prices alongside weak growth. The guide to stagflation vs recession covers how to tell them apart.

Trap 4: What Diversification Can Remove

Diversification reduces unsystematic risk, the risk specific to a single company or industry. It cannot remove systematic risk, such as interest rate, inflation or market risk, which affects the whole market.

Candidates often pick an answer saying diversification eliminates market risk. The guide to systematic vs unsystematic risk shows which risks fall into each group.

Trap 5: Standard Deviation and Beta

Standard deviation measures total volatility, the spread of an investment’s returns around its average. Beta measures volatility relative to the market, so it captures systematic risk only.

A question asking for the measure of total risk wants standard deviation, not beta. The guide to standard deviation vs beta works through both, and the guide to alpha vs beta explains how alpha measures return above what beta predicts.

Trap 6: Sharpe Ratio vs Treynor Ratio

Both ratios measure risk-adjusted return by dividing excess return over the risk-free rate by a measure of risk. The Sharpe ratio divides by standard deviation, while the Treynor ratio divides by beta.

Remember that Sharpe uses total risk and Treynor uses market risk, and this question becomes easy marks. FRC’s guide to the Sharpe ratio vs Treynor ratio includes worked calculations.

Trap 7: The Dividend Discount Model and CAPM

The dividend discount model values a stock today based on the dividends it is expected to pay in future. The capital asset pricing model, or CAPM, calculates the return an investor should expect from an asset, using the risk-free rate, the asset’s beta and the market’s expected return.

The mistake is using CAPM to answer a question about a stock’s value, or the dividend discount model to answer one about required return. The guide to the security market line vs capital market line shows how CAPM is drawn as a line on a chart.

Trap 8: Time-Weighted and Dollar-Weighted Returns

Time-weighted return removes the effect of deposits and withdrawals, so it is the standard way to judge a portfolio manager. Dollar-weighted return reflects the timing and size of the investor’s own cash flows.

The mistake is choosing dollar-weighted return to evaluate a manager who has no control over when clients add money. The guide to time-weighted vs dollar-weighted return explains both methods.

Trap 9: Reading Financial Statements

The balance sheet is a snapshot of assets, liabilities and equity at a single date. The income statement covers a period of time and shows revenue, expenses and profit.

Questions about ratios like return on equity test whether you know which statement each figure comes from. The guides to income statement vs balance sheet and return on assets vs return on equity cover the detail.

Section Two: Investment Vehicle Characteristics

Trap 10: Which Yield Is Lowest on a Premium Bond

For a bond trading at a premium, the order from highest to lowest is nominal yield, current yield, yield to maturity and then yield to call. For a discount bond, the order is reversed.

Candidates who memorize one order and forget it flips lose this mark every time. The guide to yield to call vs yield to maturity explains the logic, and the guide to callable vs non-callable bonds covers call risk for investors.

Trap 11: The Two Kinds of Duration

Macaulay duration is the weighted average time, in years, until a bond’s cash flows are received. Modified duration converts that into an estimate of how much the bond’s price changes for a 1% change in yield.

If the question asks about price sensitivity, it wants modified duration. The guide to Macaulay duration vs modified duration also shows why a zero-coupon bond’s Macaulay duration equals its maturity.

Trap 12: Conversion Parity

A convertible bond’s conversion ratio is its par value divided by the conversion price. Parity is the stock price at which converting is worth exactly the same as holding the bond, found by dividing the bond’s market price by the conversion ratio.

The mistake is using par value instead of the bond’s market price when calculating parity. FRC’s guide on how to calculate conversion parity walks through the steps.

Trap 13: Liquidation Priority

When a company is liquidated, secured creditors are paid first, followed by unsecured creditors such as debenture holders, then subordinated debt holders. Preferred shareholders come next, and common shareholders are paid last.

The mistake is placing preferred stock ahead of any form of debt. Preferred shareholders have priority over common shareholders, but every creditor ranks ahead of them.

Trap 14: Common and Preferred Stock Rights

Common stock usually carries voting rights, while preferred stock usually has no vote but has priority over common stock for dividends. Candidates often give preferred shareholders voting rights they rarely have.

The guide to common stock vs preferred stock explains the rights attached to each class.

Trap 15: The Ex-Dividend Date

To receive a dividend, an investor must buy the stock before the ex-dividend date. An investor who buys on or after the ex-dividend date does not receive that dividend; it goes to the seller.

Since the move to T+1 settlement in May 2024, the ex-dividend date and the record date usually fall on the same business day. The mistake is assuming that buying on the record date is early enough.

Trap 16: Bullish and Bearish Options Positions

Buying a call and selling a put are both bullish positions, because each profits if the stock rises or holds up. Buying a put and selling a call are both bearish.

The mistake is assuming every put is bearish, when the put writer is obligated to buy the stock and wants the price to stay up. The guide to call option vs put option covers all four positions.

Trap 17: The Uncovered Call Writer’s Risk

Someone who writes a call without owning the stock faces unlimited maximum loss, because there is no ceiling on how high the stock price can rise. A covered call writer owns the shares, so their risk is the stock falling, offset only by the premium received.

The guides to an uncovered call writer’s maximum risk and covered call vs protective put cover both positions.

Trap 18: Open-End and Closed-End Funds

Open-end funds continuously issue and redeem shares, and investors buy at the public offering price and redeem at net asset value. Closed-end funds issue a fixed number of shares that trade on an exchange, often at a premium or discount to net asset value.

The mistake is saying a closed-end fund can be redeemed with the fund company. The guide to open-end vs closed-end funds sets out every difference.

Trap 19: REITs and Direct Participation Programs

A real estate investment trust avoids corporate tax on income it distributes, provided it pays out at least 90% of its taxable income. It cannot, however, pass losses through to its investors.

A direct participation program, such as a limited partnership, can pass both income and losses through to investors. The mistake is treating a REIT as a source of tax losses.

Trap 20: Restricted Stock and Control Stock

Restricted stock describes how shares were acquired, through an unregistered private sale. Control stock describes who holds them, an affiliate such as a director or large shareholder, even if the shares were bought on the open market.

The mistake is assuming every insider’s shares carry a holding period. FRC’s guide to control stock vs restricted stock covers Rule 144’s holding periods, volume limits and Form 144.

Trap 21: Regulation D Offerings

Rule 504 allows offerings of up to $10 million in a 12-month period. Rule 506(b) has no dollar limit and allows up to 35 non-accredited investors but no general solicitation, while Rule 506(c) allows general solicitation if every buyer is accredited and verified.

The mistake is mixing up which version allows advertising. The guide to Regulation D Rule 504 vs Rule 506 covers each exemption in full.

Trap 22: Fixed and Variable Annuities

A variable annuity is a security, because the investor bears the investment risk, so selling it requires both a securities registration and an insurance licence. A fixed annuity is an insurance product, and the insurance company bears the investment risk.

The mistake is calling a fixed annuity a security. The guides to fixed vs variable annuities and what a 1035 exchange is cover how they work and how they can be exchanged without tax.

Section Three: Client Investment Recommendations and Strategies

Trap 23: Age, Time Horizon and Suitability

When a scenario describes an elderly client living on a fixed income, an aggressive growth recommendation is almost always wrong, even if the client says they are comfortable with risk. Capital preservation and income usually come first.

The same applies to a client a few years from retirement, where a large loss just before withdrawals begin can do lasting damage. The mistake is letting one detail, such as a stated risk tolerance, outweigh the client’s age, income needs and time horizon.

Trap 24: Roth and Traditional IRA Withdrawals

Roth IRA contributions are made after tax, and qualified withdrawals are tax-free, with no required minimum distributions for the original owner. Traditional IRA contributions may be deductible, and withdrawals are taxed as ordinary income.

Questions often blur which account gives the tax break now and which gives it later. The guide to traditional IRA vs Roth IRA sets out the rules side by side.

Trap 25: Rollovers and Transfers

In a rollover, the money passes through the owner’s hands and must be redeposited within 60 days, and IRA-to-IRA rollovers are limited to one in any 12-month period. A direct transfer between custodians has no such limit.

When an employer plan pays the money to the participant, 20% is withheld for federal tax. The guide to IRA rollover vs IRA transfer covers each step.

Trap 26: 529 Plans and Coverdell ESAs

A Coverdell ESA limits contributions to $2,000 per beneficiary per year and has income limits for contributors. A 529 plan has much higher limits and no income limits, and the account owner keeps control of the money.

Candidates often apply the Coverdell limit to 529 plans. The guide to 529 plans vs Coverdell ESAs compares both accounts.

Trap 27: The Wash Sale Window

A wash sale occurs when an investor sells a security at a loss and buys a substantially identical security within 30 days before or after the sale. The loss is disallowed for now and added to the cost basis of the new shares.

The mistake is forgetting the 30 days before the sale. FRC’s guide to what a wash sale is covers the full 61-day window.

Trap 28: Holding Periods and Cost Basis

A gain is long-term only if the asset was held for more than one year, not exactly one year. Inherited assets usually receive a stepped-up cost basis to their value at the date of death and are treated as long-term whatever the holding period.

Gifted assets work differently, because the donor’s cost basis generally carries over to the recipient. The guides to short-term vs long-term capital gains and what cost basis is explain each case.

Trap 29: Joint Accounts After a Death

In a joint tenants with rights of survivorship account, the deceased owner’s share passes directly to the surviving owner. In a tenants in common account, the deceased owner’s share passes to their estate.

The mistake is assuming every joint account passes to the survivor. The guide to what happens to a joint account when one owner dies covers each type.

Trap 30: Trusts, Wills and Probate

Assets held in a revocable living trust pass outside probate, while assets left under a will go through probate. A revocable trust does not, however, reduce estate tax, because the grantor still controls the assets.

The guide to revocable trust vs will explains both, and the guide to the gift tax exclusion covers how lifetime gifts are treated.

Trap 31: Who Bears the Risk in a Retirement Plan

In a defined benefit plan, the employer promises a set benefit and bears the investment risk. In a defined contribution plan, such as a 401(k), the employee bears the investment risk.

The guide to defined benefit vs defined contribution plans covers both. For ERISA’s fiduciary rules, see what ERISA is.

Trap 32: Letters of Intent and Rights of Accumulation

A letter of intent lets an investor receive a breakpoint discount now by promising to invest a set amount within 13 months, and it can be backdated up to 90 days. Rights of accumulation count the value of existing holdings toward a breakpoint, with no time limit.

The mistake is mixing up which one looks forward and which looks back. The guide to rights of accumulation vs letter of intent works through examples.

Section Four: Laws, Regulations and Ethics

This section carries 30% of the exam, and its dense legal definitions cause more lost marks than any other. Most traps here come from reading a general rule as an absolute one.

Trap 33: Exclusions and Exemptions

An exclusion means a person or firm does not meet the legal definition at all, so the law’s registration rules never apply to it. A bank, for example, is excluded from the definition of a broker-dealer under the Uniform Securities Act.

An exemption means the person or firm does meet the definition but is released from registration. The mistake is treating the two words as interchangeable, when the exam uses them precisely.

Trap 34: The Investment Adviser and the Representative

An investment adviser is the firm, the business that provides advice for compensation. An investment adviser representative is an individual who works for that firm and gives advice, manages accounts or solicits advisory clients.

The exam often asks about a firm’s requirements, such as minimum net worth or bonding, and offers answers that apply to individuals. Read who the question is about before you read the answers.

Trap 35: State or SEC Registration

Under the Uniform Securities Act and federal law, an adviser with less than $100 million in assets under management generally registers with the states. Between $100 million and $110 million, the adviser may choose SEC registration, and at $110 million it must register with the SEC as a federal covered adviser.

An SEC-registered adviser does not have to switch back to state registration unless its assets fall below $90 million. Federal covered advisers still make notice filings in the states where they do business, and their representatives register in the states where they have a place of business.

Trap 36: De Minimis Rules

A state-registered investment adviser with no place of business in a state does not have to register there if it has had fewer than six retail clients resident in that state over the past 12 months. This is the de minimis exemption.

Broker-dealers have no equivalent client-count exemption for retail customers. The mistake is applying the adviser’s de minimis rule to a broker-dealer.

Trap 37: Custody

An adviser has custody if it holds client funds or securities, or has authority to withdraw them, and custody brings extra safeguards such as qualified custodians and higher financial requirements. Under NASAA rules, an adviser that receives client funds or securities by mistake and returns them within three business days is generally not treated as having custody.

The mistake is assuming any contact with a client’s check creates custody, or that keeping it a little longer does not. The three-business-day window is the number to remember.

Trap 38: Time and Price Discretion

When a client chooses the security, the quantity and whether to buy or sell, but leaves the timing and price to the professional, that is time and price discretion. It does not require written discretionary authority.

Full discretion over the asset, amount or action does require it, and under NASAA rules an investment adviser must obtain written authority within 10 business days after the first discretionary transaction. Candidates often apply the full discretion rules to time and price orders.

Trap 39: The Fiduciary Duty and Disclosure

Investment advisers owe their clients a fiduciary duty, meaning they must put the client’s interests ahead of their own and disclose material conflicts of interest. Disclosure, however, does not make an unsuitable recommendation acceptable.

The guides to what fiduciary means, fiduciary standard vs suitability standard and what conflicts of interest an investment adviser must disclose cover this section in depth.

Trap 40: Which Hat Is the Professional Wearing?

Many professionals are dual registrants, acting as an agent of a broker-dealer in some transactions and as an investment adviser representative in others. The standard that applies depends on the capacity in which they are acting at the time.

When the scenario describes advice given for an advisory fee, the fiduciary duty applies. The mistake is applying the broker-dealer conduct standard to an advisory relationship, or the reverse.

Trap 41: Form U4 Disclosure

Form U4 asks whether an individual has ever been convicted of, or charged with, a felony, so there is no time limit on disclosing a felony. The 10-year period candidates often remember applies to statutory disqualification, not to disclosure.

The mistake is believing an old felony no longer needs to be reported. Failing to disclose it can itself lead to disciplinary action.

Trap 42: What the Administrator Can and Cannot Do

The state Administrator can deny, suspend or revoke registrations, issue subpoenas and issue cease-and-desist orders, in some cases without a prior hearing. It cannot issue an injunction or impose a prison sentence, because those powers belong to the courts.

The mistake is choosing an answer that gives the Administrator criminal or court powers. When a question asks who can send someone to prison or order an injunction, the answer is a court.

Trap 43: Exempt Securities, Federal Covered Advisers and Fraud

An exempt security or exempt transaction is excused from registration, not from the antifraud provisions. Fraud is prohibited in every securities transaction, whatever its registration status.

The same applies to federal covered advisers. Even though they register with the SEC, the state Administrator keeps the power to investigate and act against fraud within the state.

Trap 44: Fraud by Omission

Leaving out a material fact can be fraud, just as stating a false one can. Promoting a fund’s track record without mentioning that the manager who produced it has left is a classic example.

The mistake is choosing an answer that treats silence as safe. On this exam, what a professional fails to say is judged as strictly as what they say.

More Unethical Practice Traps

Several shorter traps appear in the ethics questions. An agent or adviser cannot guarantee a client against loss, but can describe a security that carries an issuer or third-party guarantee of payment.

Sharing in the profits or losses of a client’s account is generally prohibited, unless the client gives written consent, the firm approves and the share is proportionate to the agent’s own contribution. Borrowing from clients is prohibited, except from clients in the business of lending money, such as banks.

Performance-based fees are allowed only with qualified clients, who must meet asset or net worth thresholds. Advertising that shows only winning recommendations, while hiding the losing ones, is misleading.

Clerical and administrative staff are not agents, and only individuals, never firms, can be agents under the Uniform Securities Act. Those definitions sit behind a large share of the law questions.

Test-Taking Mistakes That Cost Marks

Some marks are lost by candidates who know the material. The first mistake is studying for recall instead of application, when many questions ask for the most appropriate action and offer several answers that all sound reasonable.

The second is over-calculating. The Series 65 includes some calculations, but many quantitative questions test whether you know which formula applies rather than asking for long arithmetic.

The third is reading a long scenario before you know the question. Read the last sentence first, underline any qualifier and then read the scenario looking only for the facts that answer it.

The fourth is reviewing only the questions you got wrong in practice. A correct answer reached by guessing hides the same weakness as a wrong one.

Common Questions About the Series 65

How many questions can you get wrong on the Series 65? You need 92 correct out of 130 scored questions, so you can miss 38. Because the 10 pretest questions are not identified, aim to answer every question as if it counts.

Is the Series 65 harder than the Series 7? They test different things. The Series 7 is longer, with 125 scored questions over 3 hours and 45 minutes, and focuses on products and broker-dealer activity, while the Series 65 puts 30% of its weight on law and ethics and many candidates find its wording harder.

Is the Series 65 a FINRA exam? It is a NASAA exam that FINRA administers, which is why its rules come from the Uniform Securities Act and state regulation rather than FINRA’s own rulebook. Unlike the Series 7, it does not require firm sponsorship or the SIE.

Which FINRA exam is hardest? There is no official ranking, and difficulty depends on your background. Candidates with a product background often find the Series 65’s legal and ethics questions harder, while those with a compliance background often find the reverse.

Learn Each Trap in Depth

Most traps above link to a full FRC guide, with worked examples and practice questions. The FRC Series 65 playlist linked at the top of this guide pairs each topic with a video, so you can watch the explanation and then test yourself on the page.

The FRC dictionary is more than a dictionary. It is a library of explainer videos, written explanations and on-page quizzes covering the rules you are tested on, so you can open any term and go deeper whenever a question catches you out.

Study With FRC

FRC’s programs and memberships are open to everyone. Whether you are preparing for the Series 65 alone or alongside the SIE and Series 7, structured preparation turns these traps from lost marks into reliable ones.

FRC’s Professional Membership adds verified progress and a Digital Profile, so when you apply for roles, employers can see your exam progress and the knowledge you are building, not just read about it on a resume.

Your Next Step

The Series 65 does not reward speed reading. It rewards candidates who know where the traps sit, slow down on the qualifiers and can tell near-identical answers apart.

Pick the three traps in this guide you feel least sure about, open their full guides and work through the practice questions today. Repeat that each week, and the mistakes that cost other candidates their pass will become the questions you answer with confidence.