7 - The Process of Giving Investment Advice (11/80) Flashcards
Adviser Skills
Personal
Organisational
Technical
Integrity
Client Information Required
- Personal details
- Financial situation (income, outgoings, assets, liabilities)
- Future/expected financial situation
- Other arrangements (products, advisers)
- Goals (quantify and turn into measurable objectives)
- Risk tolerance and capacity for loss
- Liquidity and time horizons
- Tax status
- Investment preferences (ESG etc.)
Collected through questionnaire/interview/KYC forms
Robo-advisers
A: Easy to set up, low minimums, cheaper, tax efficient (harvesting), removes behaviour
D: Not personalised, very simple, fixed fees could be high %, tech limited
Fair Treatment of Customers (FTOC)
- FTOC is core to company culture
- Products align to customer needs
- Clear information provided
- Advice is suitable
- Performance is as expected
- No post-sale barriers
FCA Principles for Business
- Integrity
- Skill, care, due diligence
- Management and control
- Financial prudence
- Market conduct
- Customer interests
- Client communications
- Conflicts of interest
- Client trust
- Separate client assets
- Cooperate with FCA
Suitability
Mostly aligned to affordability, risk appetite and goals
Also based on client knowledge and experience of products/services
Client profession and education taken into account
Take care of crystallisation/encash charges when switching
Must match products to goals e.g. low risk for specific future expense
Must provide the client a report with WHY products are suitable
Monitoring and Review
Client and market circumstances always changing
Regular reviews of investments and other finances
Financial Planning Process
- Determine requirements
- Formulate a strategy (assess needs, position, and priorities)
- Assess existing assets and potential solutions (relevant to needs and position)
- Produce recommendations and a final plan
5/0. Revisit and review often
Determining Risk Appetite
Objective = best = age, wealth, liquidity needs, time horizon
Subjective = worse = attitudes and personality
Charity Investing
Rules set by the Trustee Act 2000
Trustees must show general duty of care, consider suitability, diversify, review
Must work with investment managers to set and review investments
Must ensure IMs etc. are qualified professionals
Must balance returns with charitable aims
-> ‘Mixed motive’ investments that do both must be reported separately
Repaying a Mortgage
Client is usually better off repaying due to reducing total interest paid
BUT
Be aware of:
- Fixed vs variable loan
- Repayment penalties
- Interest rate direction
- Tax status
Qualitative vs Quantitative Asset Allocation
Quant = models to weight assets for optimum correlations and returns
Qual = ‘rule of thumb’ allocations e.g. ‘Age - 100 = equity %”
Presenting Recommendations
Provide a written report:
- Statement of objectives
- Summary of income and assets
- Recommendations, timeline and priorities
- Appendices, including supporting data
Language should be clear and concise (no jargon)
Data should be in a logical order
Clients must be able to understand everything
Consumer Rights laws
EU Unfair Terms in Consumer Contracts 1995
-> Transactions should not go ahead if unfair to consumers
Consumer Credit Directive 2010
-> Harmonised rules for loans <1 month and Firms can go to court if they reject FOS decisions
General Advice Rules/Regulations
- Financial promotions (fair and clear)
- Status disclosure (IFA, agent etc.)
- Terms of business/client agreements
- KYC/AML
- Execution-only transactions
- Charges/commissions
- Cancellation/cooling-off rights
