3 : 5 - Implementing Financial Planning Recommendations Flashcards

1
Q

When do rules on suitability apply?

A

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

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2
Q

What is the reason for suitability rules?

A

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

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3
Q

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

A

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.

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4
Q

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

A

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

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5
Q

What is meant by a client’s Financial situation?

A

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

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6
Q

What is meant by a client’s Objectives?

A

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

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7
Q

Does suitability apply to execution-only business?

A

No

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8
Q

Does suitability apply to someone classified as a professional client?

A

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

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9
Q

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

A

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.
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10
Q

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

(3)

A
  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.
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11
Q

What is the content of the Suitability report?

A

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.

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12
Q

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

A

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.

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13
Q

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:

A
  • 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.
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14
Q

How are recommendations measured?

A

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.

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15
Q

How does the client trust relationship work?

A

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.

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16
Q

What is one method of building trust?

A

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.

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17
Q

The adviser should document the following:

A

• 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.

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18
Q

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

A
  • key features of the product (KFD)

* product illustration (key facts illustration – KFI)

19
Q

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

(4)

A
  • Aims
  • Commitment to the investment
  • Risks
  • Questions and Answers
20
Q

The KFI must cover:

A
  • 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.
21
Q

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

A

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)

22
Q

Why is the review process fundamental to financial planning?

A

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

23
Q

When is the set interval between review meetings?

A

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.

24
Q

Ultimately, the objective of each review is what?

A

To tell the client whether they remain on track to meet

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

25
Q

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

A

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.

26
Q

The review should look at a range of factors including:

A

• 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.

27
Q

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

A

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.

28
Q

What is the definition of asset allocation?

A

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

29
Q

Recap:

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

A

Priorities must be agreed upon.

30
Q

The best financial plans ensure that clients have what?

A

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).

31
Q

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

(2)

A

• future inflation (CPI)

and

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

32
Q

How should growth rates be treated?

A

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.

33
Q

How do growth rates relate to risk?

A

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.

34
Q

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

A

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.

35
Q

Why is this complicated to approach?

A

eg: a company may be involved in the

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

36
Q

What does CSR stand for?

A

Corporate social responsibility

37
Q

What does ESG stand for?

A

Environmental, Social and Governance

38
Q

How is Sustainability measured in funds?

A

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.

39
Q

EG:

Light green funds

A

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.

40
Q

EG:

Medium green funds

A

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.

41
Q

EG:

Dark green funds

A

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.

42
Q

EG:

Engagement green funds

A

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.

43
Q

What are SRI funds?

A

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.