3 : 5 - Implementing Financial Planning Recommendations

Question 1

When do rules on suitability apply?

Answer 1

When firms make personal recommendations related to designated investments, and when they manage investments.

Question 2

What is the reason for suitability rules?

Answer 2

These rules exist to ensure that firms take all reasonable steps to see that recommendations, or decisions to trade, are suitable for the client

Question 3

In order to assess the suitability of an investment decision for any particular client, the adviser should
look at what 3 elements?

Answer 3

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.

Question 4

What is meant by a client’s Knowledge/experience?

Answer 4

Experience and knowledge to understand risks in the transactions or management of portfolio

Question 5

What is meant by a client’s Financial situation?

Answer 5

Ability to financially bear any related investment risks consistent with investment objectives

Question 6

What is meant by a client’s Objectives?

Answer 6

Preferences regarding risk-taking, length of time to hold investment, risk profile, purpose of investment

Question 7

Does suitability apply to execution-only business?

Answer 7

No

Question 8

Does suitability apply to someone classified as a professional client?

Answer 8

No - firms can assume that the client has the necessary knowledge in this area.

Question 9

When would a suitability report have to be provided to a retail client?

Answer 9

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.

Question 10

FCA guidance on suitability reports explains that a firm must provide the suitability report to the client:

(3)

Answer 10

1. 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
2. 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
3. in any other case, when or as soon as possible after the transaction is effected or executed.

Question 11

What is the content of the Suitability report?

Answer 11

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.

Question 12

How do content requirements change when the personal recommendation is about income withdrawals / the purchase of short-term annuities / UFPLS payments?

Answer 12

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.

Question 13

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:

Answer 13

• 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.

Question 14

How are recommendations measured?

Answer 14

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.

Question 15

How does the client trust relationship work?

Answer 15

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.

Question 16

What is one method of building trust?

Answer 16

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.

Question 17

The adviser should document the following:

Answer 17

• 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.

Question 18

The production of this document must be to the same standard as any marketing material with two elements:

Answer 18

• key features of the product (KFD)

* product illustration (key facts illustration – KFI)

Question 19

The KFD describes the product in the order of the following headings:

(4)

Answer 19

• Aims
• Commitment to the investment
• Risks
• Questions and Answers

Question 20

The KFI must cover:

Answer 20

• the premium or investment
• any guaranteed benefits, ie, sum assured
• a projection of the final benefit, based on the FCA-specified assumed growth rate
• the effect of charges
• the commission payable to the adviser.

Question 21

Why is it difficult to determine why a client does not wish to proceed with an adviser’s recommendations?

Answer 21

This is as important as the ‘know your customer’ process.

The process of finding out may not be easy, as the client may be embarrassed to disclose the
true reason – (EG: it may not be affordable)

Question 22

Why is the review process fundamental to financial planning?

Answer 22

Without reviews, it is unlikely that a client will achieve their objectives.

Question 23

When is the set interval between review meetings?

Answer 23

Although there is no set interval between review meetings, it is generally accepted that the frequency of review meetings should be agreed, in advance, with the client.

The client may also ask for a review at any time if their circumstances have changed, or for other reasons, such as during periods of extreme market volatility and if tax rates change.

Question 24

Ultimately, the objective of each review is what?

Answer 24

To tell the client whether they remain on track to meet

their objectives, and, if not, what additional actions may be required.

Question 25

A financial plan should, generally, be reviewed how often?

Answer 25

At least every 12 months

But ad hoc reviews may also be required if, for example, the client experiences a significant change of personal circumstances.

Question 26

The review should look at a range of factors including:

Answer 26

• reviewing the previous advice in light of any changes to the client’s circumstances and revising recommendations where necessary
• changes to goals and objectives and the amounts targeted
• reviewing and amending the assumptions used, where relevant, to take account of changing market
conditions, investment returns and future inflation rates
• net worth and income and expenditure
• asset allocation and client risk profiles (including rebalancing portfolios)
• appropriateness of products and product wrappers held and revisiting the risk appetite and capacity
for loss of the client
• obtaining any documentation that may be required in the review meeting
• checking existing terms of business documentation, etc, and preparing updated documents, where
necessary.

Question 27

What is the borad principle adopted when managing risk/reward balance?

Answer 27

When there is a longer-term timescale, (eg, more than five or ten years before funds are required), then higher-growth equities are more suitable

Bonds and income-generating shares are more suitable when the timescale is less than five years.

Question 28

What is the definition of asset allocation?

Answer 28

It is the process of exposing differing proportions of an investment portfolio to various asset classes such as growth or income equities, fixed-interest stocks, property assets, derivatives and foreign investments

Question 29

Recap:

What should be done when a client’s budget to fund financial solutions is scarce?

Answer 29

Priorities must be agreed upon.

Question 30

The best financial plans ensure that clients have what?

Answer 30

Sufficient liquidity for expenditure requirements and
for unexpected emergencies, that protection is in place in case of death, critical illness or the inability
to work while ensuring that investments are aligned to clients’ attitude to risk and are suitable for the
clients objectives (be that income, growth or a combination of both).

Question 31

Financially related recommendations involve a number of key assumptions which impact financial
planning; these include:

(2)

Answer 31

• future inflation (CPI)

and

• earnings growth (National Average Earnings (NAE)).

Question 32

How should growth rates be treated?

Answer 32

Remember that a plan based on a client’s income and expenditure will necessitate an assumption on growth rates for future price inflation and future earnings growth.

Of course, it is entirely feasible to model different assumptions and build in differing growth and inflation rates for different periods in the client’s life, but in the end a plan has to be agreed based on one set of assumptions at a time.

Question 33

How do growth rates relate to risk?

Answer 33

The key to making appropriate recommendations is accurately assessing the client’s attitude to risk. Risk raises the possibility that the client may lose some or all of their investment, or that the growth rates that have been assumed do not materialise.

Question 34

How do Ethical/Environmental/Sustainable investments differ from traditional ones?

Answer 34

Perhaps the best explanation is that traditional investment funds consider mainly economic and
financial performance - while sustainable investments look to achieve good returns at the same time as
looking at the wider issues associated with ethical and socially responsible principles.

Question 35

Why is this complicated to approach?

Answer 35

eg: a company may be involved in the

armaments industry but may only make defensive weaponry for UN peacekeepers.

Question 36

What does CSR stand for?

Answer 36

Corporate social responsibility

Question 37

What does ESG stand for?

Answer 37

Environmental, Social and Governance

Question 38

How is Sustainability measured in funds?

Answer 38

Funds vary according to the weighting given to a variety of aspects of corporate social responsibility.

These are often categorised by shades of green: light
green being the loosest criteria and dark green being the strictest.

Question 39

EG:

Light green funds

Answer 39

These tend to invest in most equity sectors and often reflect the weightings that are seen in a stock market index.

They may invest in the oil, pharmaceuticals and banking sectors, usually avoiding tobacco, environmental
exploitation, armaments, animal testing or companies with poor human rights records.

Question 40

EG:

Medium green funds

Answer 40

These are similar to light green but with stricter criteria – albeit there may still be investments in oil, banks and pharmaceuticals.

These funds invest in smaller companies, although they mainly restrict this investment to the UK, Europe and North America.

Question 41

EG:

Dark green funds

Answer 41

These apply much stricter ethical criteria and may not have exposure to the oil, banking and pharmaceutical sectors or a very limited one.

Due to the investment limitations and stricter ethical screening, the investment performance may be affected. The risk profile is also quite different in that such funds may invest more of the portfolio in smaller companies than in large ones.

Question 42

EG:

Engagement green funds

Answer 42

These use a method of positive screening where investments are chosen specifically because those companies display positive action and set standards in good corporate social responsibility.

Question 43

What are SRI funds?

Answer 43

Socially responsible investment (SRI) funds.

It is in the interests of any company not to have its share excluded from such funds, particularly if the number of those funds continues to grow.