1) Analysing the client’s financial situation – Suitability of assets received from Carl

Question 1

Identify the key factors you would need to consider when advising Andrea on the suitability of the assets she has received from Carl. (34 points!)

Answer 1

• ISAs and pensions are more tax efficient than the individual shares and OEICs.
• No CGT liability at the time of transfer of assets to Andrea as they were subject to formal divorce agreement.
• Vulnerability.

Pharmaceutical shares
* Type of stocks within portfolio ie, are they large companies or upstart biotech stocks?
* The shares are likely to be high risk/this does not match Andrea’s cautious ATR.
* She has adequate capital so no need to take high risk.
* Good potential for growth and income.
* Regular monitoring/ongoing administration/need for simplification/need for tax reporting/certificated/harder to sell.
* Recent reduction in dividend payments (UK economy)/current economic conditions/dividends are not guaranteed.
* Lack of asset diversification/single sector/equities.
* All UK based/lack of geographic diversification.
* Uses dividend allowance.
* Dividends taxable if exceeds DA, as she is a higher rate taxpayer taxed at 33.75%.
* Cost of selling/liquidity shares.
* She may have a CGT liability on sale/the base cost used is Carl’s acquisition cost/liability over CGT AEA of £6,000 (£3,000 from 24/25) taxed at 20%.

OEICs
* Charges/performance.
* Provides some fixed interest holdings in her portfolio/adds asset diversification.
* Only investment grade corporate bonds suitable for her cautious ATR.
* UK global equity tracker funds likely to be low cost.
* Will perform in line with equity index/easy to monitor.
* Provides global diversification.
* Good potential for growth.
* No actively managed funds/no alpha.
* Uses dividend allowance (DA).
* Dividends from equity OEIC taxable if exceed DA, as she is a higher-rate taxpayer taxed at 33.75%.
* Income from corporate bond fund taxed as interest/40%.
* Cost of selling/liquidity shares.
* May have CGT on sale/base cost used is Carl’s acquisition cost /liability over CGT AEA of £6,000 taxed at 20%.

Property
* Ability to downsize in future to help fund retirement.
* May be larger than required for just Andrea/expensive to maintain on her own.
* Home is approximately 50% of assets (excluding pensions).
* NO SDLT on transfer from Carl/no CGT on sale.
* Good potential for capital growth.
* Does not need capital from house currently.

Question 2

Explain to Andrea how diversification may be used to manage and reduce risk. (6 points)

Answer 2

• Diversification reduces risk by reducing concentration/increasing the number of asset classes.
• Some asset classes are not strongly correlated - a loss with one asset class might not mean a loss in another.
• Downside risk of one investment can be offset by the upside potential of another.
• Geographical diversification spreads the risk across a number of different economies / currencies / national markets.
• Sector diversification reduces the risk associated with specific areas of the economy or particular firms.
• Diversification can reduce investment specific risk but not market risk.

Question 3

State the factors an adviser would need to consider when deciding if Andrea should consider consolidating all her assets onto the platform she currently uses for her ISA. (19 points)

Answer 3

• Ease of transferring other assets onto platform.
• Range of providers/asset classes/funds/investments/tax wrappers available.
• Limitations of platforms – which products are not available.
• Does it have access to the same funds/shares (or share class) as OEICs and individual shares.
• Is an in-specie transfer possible to avoid the sale of assets?
  o market movements if existing assets need to be sold.
  o CGT liability on OEICs and shares.
• Initial charges/exit charges or fees for moving existing OEICs and shares.
• Platform charges/adviser charges.
• Andrea’s age/ease of paperwork/time/effort as she gets older.
• Wealth can be seen at the press of a button.
• Performance is easy to obtain.
• Can apply asset allocation strategies across different tax wrappers/possibility of automatic rebalancing.
• Online switching/easy to gradually bed and ISA OEICs and shares.
• Consolidated tax statements are automatic.
• Charges/discounts for large portfolios such as Andrea’s.
• Which calculation tools are available.
• Reports and valuations can be stored online.
• Other platforms may offer more choice/cost/comparison.