09. The investment advice process

Question 1

Name the 5 stages of the investment advice process.

Answer 1

1. Determine client’s needs & objectives.
2. Analysis their financial position.
3. Formulate a strategy to meet objectives.
4. Produce recommendations & implement.
5. Revisit investments, objectives & strategy.

Question 2

What document should the adviser provide the client with at the beginning of the relationship and for what purpose?

Answer 2

• The client agreement.
• To provide info about the scope of the services offered and costs.

Question 3

Name 6 key areas of a fact-find.

Answer 3

1. Personal info.
2. Needs & objectives.
3. Assets & liabilities.
4. Income & expenditure.
5. Priorities.
6. Attitude to risk.

Question 4

What is the most important outcome of the fact-finding process?

Answer 4

A clear understanding of the client’s goals and their expectations.

Question 5

What does the adviser need to do when the client has unrealistic goals?

Answer 5

Make them aware & negotiate more realistic ones.

Question 6

What are the 3 components of the client’s risk profile?

Answer 6

1. Attitude to risk.
2. Tolerance of risk.
3. Capacity for loss.

Question 7

Investors’ return objectives

Answer 7

• Capital preservation (for risk-averse).
• Capital appreciation (for longer-term investors where real term growth is the priority).
• Current income (income prioritised over gains).
• Total return (for longer-term investors wanting balance of growth and reinvestment of income).

Question 8

What are the 2 main approaches regarding sustainable & ESG investing?

Answer 8

1. Positive screening.
2. Negative screening.

Question 9

Name 5 constraints when constructing investor objectives.

Answer 9

1. Time horizon.
2. Liquidity.
3. Tax.
4. Legal & regulatory factors.
5. Unique needs & preferences.

Question 10

The purpose of asset allocation is to enable advisers to ~~~.

Answer 10

meet clients’ needs.

Question 11

Asset allocations between different risk profiles:

1. Cautious income.
2. Cautions growth.
3. Balanced income.
4. Balanced growth.
5. Income & growth.
6. Growth.
7. Adventurous.

Answer 11

Cash / Bonds / Property / Equities

1. 15% / 40% / 15% / 30%
2. 15% / 35% / 10% / 40%
3. 10% / 30% / 15% / 45%
4. 10% / 30% / 10% / 50%
5. 5% / 25% / 15% / 55%
6. 5% / 15% / 15% / 65%
7. 5% / 10% / 10% / 75%

Question 12

What is strategic asset allocation and is it a long term or short term strategy?

Answer 12

• Using risk profile to determine a strategic asset allocation then regular rebalancing to maintain it.
• Long term

Question 13

What is tactical asset allocation and is it a long term or short term strategy?

Answer 13

• Vary strategy by choice from the mid-points to take advantage of market conditions.
• Short term.

Question 14

Rebalancing effectively presumes a reversion ___.

Answer 14

to the mean will prevail.

Question 15

What is sequencing risk?

Answer 15

The risk of withdrawing too much capital during (or immediately after) a market downturn, which then creates a drag on investment growth.