3 : 5 - Implementing Financial Planning Recommendations Flashcards
When do rules on suitability apply?
When firms make personal recommendations related to designated investments, and when they manage investments.
What is the reason for suitability rules?
These rules exist to ensure that firms take all reasonable steps to see that recommendations, or decisions to trade, are suitable for the client
In order to assess the suitability of an investment decision for any particular client, the adviser should
look at what 3 elements?
Knowledge/Experience + Situation + Objectives
• client’s knowledge and experience in the investment field relevant to the specific type of designated
investment or service
• client’s financial situation
• client’s investment objectives.
What is meant by a client’s Knowledge/experience?
Experience and knowledge to understand risks in the transactions or management of portfolio
What is meant by a client’s Financial situation?
Ability to financially bear any related investment risks consistent with investment objectives
What is meant by a client’s Objectives?
Preferences regarding risk-taking, length of time to hold investment, risk profile, purpose of investment
Does suitability apply to execution-only business?
No
Does suitability apply to someone classified as a professional client?
No - firms can assume that the client has the necessary knowledge in this area.
When would a suitability report have to be provided to a retail client?
If that client has:
- received a personal recommendation to buy or sell a holding in a regulated collective investment scheme or certain investment trusts;
- buys, sells, surrenders, converts or cancels rights under or suspends contributions to a personal pension plan;
- elects to make income withdrawals or uncrystallised funds pension lump sum payment (UFPLS) or by a short-term annuity, or enters into a pension transfer, pension conversion or pension opt-out.
FCA guidance on suitability reports explains that a firm must provide the suitability report to the client:
(3)
- in the case of a life policy, before the contract is concluded unless the necessary information is
provided orally or immediate cover is necessary OR - in the case of a personal pension scheme or stakeholder pension scheme, where the rules on
cancellation (COBS 15) require notification of the right to cancel, no later than the 14th day after the
contract is concluded OR - in any other case, when or as soon as possible after the transaction is effected or executed.
What is the content of the Suitability report?
There is little prescription in the content of the suitability report except that it must at least specify
the client’s demands and needs (objectives), explain why the recommended transaction is suitable
having regard to the information provided by the client and explain any possible disadvantages of the
transaction for the client.
How do content requirements change when the personal recommendation is about income withdrawals / the purchase of short-term annuities / UFPLS payments?
The requirement is that the letter should explain the risks involved in entering one of these contracts and set out some of the possible risks.
A suitability report will also signpost additional documentation to support the recommended course of action. This could include some or all of the following documents:
- an FCA-compliant illustration
- key features document (KFD)
- product marketing literature
- post-sale illustration
- suitability letter/report
- the product provider must also send a cancellation (cooling-off) notice.
How are recommendations measured?
The financial plan should also include a detailed action plan highlighting the recommendations and related actions and explaining the next steps required, who is accountable for implementing those steps and a target date for completion. This avoids any misunderstanding as to the next steps.
How does the client trust relationship work?
The trust relationship works both ways: the adviser must trust the client to disclose all material personal
and financial information in order to be able to provide the correct advice.
The client must trust the adviser to be knowledgeable and up-to-date enough to recommend products and services that actually meet their goals and aspirations, professional enough to place principles over personal gain, and to have the highest levels of integrity.
What is one method of building trust?
It is vital that the financial planner is able to clearly summarise the content of any client meeting and what outcomes were agreed, what the adviser will action and what will be confirmed when the actions have taken place.
This helps in matching the suitability of the products and/or services recommended to the client’s needs and in building the relationship between the adviser and client, as well as helping to avert misunderstandings at future stages, and complements the KYC information held.
The adviser should document the following:
• introduction including where the meeting was held and when
• confirmation of any current products/plans including their key terms, penalty charges as well as the
benefits, current valuation and/or transfer values
• client’s needs analysis
• description of future identified needs if different to current ones
• client’s risk attitude
• options offered to the client including benefits and any disadvantages of those options
• agreed action plan
• illustrations with relevant details of products/services agreed upon including costs, ongoing charges and key terms
• agreed review periods
• explanation of what can be done if the client changes their mind and any complaints procedure.