1) Financial Advice Processes – Fact-finding, Reviews, General

Question 1

State the additional information that a financial adviser would require in order to advise Andrea on the suitability of her financial arrangements. (14 points)

Answer 1

• Family health/longevity.
• Current expenditure/willingness, ability to economise.
• Were the OEICs, shares and house her full entitlement following divorce.
• Employment plans/retirement date – will it be phased?
• Expected income and capital needs in retirement.
• Views on flexibility/secured income.
• Need for escalation/views on inflation in retirement.
• Any plans for the downsizing?/future lumps sums or inheritance expected.
• Plans to gift money to sons/grandchildren/desire to leave a legacy.
• Views on long term care funding.
• Priorities of objectives.
• State Pension entitlement/BR19.
• Affordability/willingness to make additional pension contributions/contribution history.
• Details of existing pension/charges/performance/salary sacrifice available?
• Nomination forms completed and updated since divorce?
• Emergency fund required now and in retirement.
• Why is she holding £180,000 in cash/are deposit and current accounts with the same bank (for FSCS limits)?
• Interest rates on her current and deposit account/any term on deposit account?
• Yield on OEICs & shares/performance/base cost of shares/OEICs.
• Performance, charges and details of platform for ISAs.
• Timescales and priorities for each investment.
• Has she used her ISA allowance for the current year?
• What is the cost to Andrea of joining Group PMI scheme?/type of cover offered..
• Views on NHS/joining her employer PMI scheme/when can she join?
• View on other protection needs
• CFL.

Question 2

State the additional information that Andrea’s financial adviser would require in order to advise her on the OEIC and pharmaceutical shares she has received as part of her divorce settlement. (9 points)

Answer 2

• Yield on OEICs and shares.
• Where are they held – platform/how easily could they be transferred to her ISA platform?
• Base costs of individual shares & OEICs.
• Any dividends reinvested?
• Any withdrawals from OEICs/encashments from shares?
• Views on holding these investments?
• Types of individual shares held (large companies, start-ups?)/risk profile/performance.
• Details of funds/risk profile/performance/charges/type of corporate bonds held, investment or non-investment grade?
• Views on diversifying with actively managed funds/more global holdings/fixed interest/commercial property?

Question 3

State the process that an adviser should follow when advising Andrea on her financial situation. (12 points)

Answer 3

• Establish/define relationship/confirm scope of service/fees.
• Andrea may be classed as a vulnerable client due to recent divorce, if so
  o adviser should make it easy for her sons or a friend to be present at any meetings.
  o offer flexibility around appointment locations, times of day and duration.
  o choose method of communication that best suits Andrea.
• Fact find/determine immediate and future objectives post-divorce including:
  o Establishing retirement needs inc. retirement date, views on flexible vs guaranteed income/views on PMI/protection/providing for family.
  o Realistic timescales/priorities of each objective.
• Confirm capacity for loss (CFL) now Andrea has received all the assets from her divorce/ATR (currently cautious).
• Analyse current situation/existing investments/identify shortfalls/obtain BR19/ensure nominations are updated following divorce.
• Develop financial plan/research.
• Present financial plan/recommendations/discuss.
  o Consider staggering advice over several meetings to allow time for consideration if adviser feels Andrea is a vulnerable client.
• Provide key information documents/suitability report.
  o Provide jargon free information.
• Implement plan/obtain client agreement.
• Monitor financial plan/vulnerable status and review.

Question 4

State the main factors that might affect Andrea’s attitude towards investment risk following her divorce. (11 points)

Answer 4

• Timescale/intended retirement age.
• Age.
• She is now solely reliant on her own income.
• Income and expenditure following divorce.
• She has significant assets following receipt of the shares, OEICs and the family house, so her CFL has increased.
• Large emergency fund.
• She does not appear to have any liabilities and is mortgage free/ability to downsize.
• Experience/understanding of market/investments.
• She is in good health/lack of protection products.
• Objectives.
• State Pension entitlement.

Question 5

Explain the benefits to Andrea of a current cash flow statement when devising her financial plan. (7 points)

Answer 5

• Will consider her expenditure needs post-divorce/shows difference between expenditure and income.
• Highlights areas for cost reduction.
• Will consider retirement needs and identifies opportunities to fill gaps whilst still working.
• Can be used for analysing future cash flows in retirement.
• Can stress test for periods of high inflation and how her portfolio might perform in a downturn.
• Will identify the point Andrea could potentially run out of money if she chooses FAD.
• Enables Andrea to understand the long-term impact of large items of expenditure.

Question 6

State the benefits and drawbacks of using an asset allocation model when devising an investment strategy for Andrea. (12 points)

Answer 6

Benefits
* Can match her cautious ATR.
* Considers past and expected future returns.
* Considers volatility.
* Identifies issues in current portfolio.
* Can include geographical, sector allocations as well as asset allocation.
* Can consider income and/or growth requirements.
Drawbacks
* Doesn’t recommend an appropriate tax wrapper/take account of Andrea’s tax position.
* Charges are not considered.
* Questions asked aren’t always relevant.
* Different models produce different results.
* Underlying assumptions subject to change/based on historic data.
* Needs to be reviewed.

Question 7

Identify the key issues that a financial adviser should discuss with Andrea at the next annual review. (13 points)

Answer 7

• How is Andrea coping following divorce a year on/vulnerability status?
• Changes to views or objectives.
• Changes in income/expenditure.
• Changes in employment/tax status.
• Any inheritances or capital sums received?
• Changes to risk profile/CFL.
• Use of tax allowances/pension contribution history.
• Did Andrea decide to keep the OEICs and individual shareholding?/priorities for these investments?/Any income taken or reinvested?
• Did Andrea reduce cash holdings?/are cash holdings now under the FCSC limit?
• Asset allocation/performance/rebalance/did she switch from UK equity tracker funds in ISA?
• New products available/political/economic changes/market conditions.
• Any changes to health/family/other personal circumstances.
• Did she join her new employer PMI scheme?/cost.

Question 8

Explain to Andrea why she should review her investments as soon as possible and then on a regular basis. (9 points)

Answer 8

• Recently divorced so income and capital needs may be unclear.
• ATR/CFL may have changed now she is divorced and may change once she has adapted to the change in her personal circumstances.
• Assets from Carl do not match Andrea’s ATR/need to align asset allocation to suit Andrea.
• Make use of allowances in the current year (and ongoing) e.g. CGT AEA/ISA allowance.
• Review performance/charges.
• Personal circumstances may change.
• Ensure income and dividends from OEICs and shares match needs/options to take natural dividend income, reinvest or take fixed monthly income from OEICs.
• Individual shares and OEICs require regular monitoring.
• Political/economic/legislative/taxation changes/new products.