7.1 Adviser’s duty to clients & Assessing Client needs

Question 1

What are the 2 broad categories of investors?

Answer 1

1. Individual investors
2. Institutional investors

Question 2

How are individual investors typically categorised by financial services firms?

Answer 2

Individual investors are typically categorised by financial services firms based on their wealth – in order to better allocate products that are affordable – and their knowledge** and **experience – in order to meet regulatory requirements.

Question 3

Is there an official categorisation of individual clients?

Answer 3

No

Question 4

What are some unofficial terms used to categorise retail clients?

Answer 4

1. Retail investor
2. Private client
3. High net worth client
4. Ultra-high net worth client

Question 5

List and define the 2 distinctions the FCA identifies in individual clients.

Answer 5

1. High net worth individual – Income of over £100,000 per year and/or net assets of at least £250,000
2. Sophisticated investor – an individual who has been certified by their financial service provider as understanding the products they are involved in

Question 6

List 4 types of institutional investors.

Answer 6

1. Pension funds
2. Insurance companies
3. Collective investment schemes
4. Investment trust companies.

Question 7

List and explain the 3 categories of clients under the COB rules.

Answer 7

1. Retail client – deemed to have least knowledge and experience so offered the most protection.
2. Professional clients – deemed to have knowledge and experience so protection is less than for retail clients.
3. Eligible counterparties – deemed to have the same knowledge and experience as the firm providing the financial service, so receive the least protection.

Question 8

What is a key point in respect of financial advice?

Answer 8

Suitability! All personal recommendations and all investment management decisions must be suitable to the investor.

Question 9

Suitable means gathering sufficient information to answer 3 questions. What are the 3 questions?

Answer 9

1. Does the advice meet the client’s objectives?
2. Is the client able to afford the financial risks?
3. Does the client understand the financial risks?
    

Question 10

Which principle does the FCA’s Treating Customers Fairly (TCF) initiative reinforce?

Answer 10

Principle 6 (Customers’ interests)

Question 11

What is the aim of the Treating Customers Fairly (TCF) initiative?

Answer 11

It is a core part of the FCA’s move to a more principles-based approach to regulation. The Treating Customers Fairly (TCF) initiative aims to introduce a step-change in the behaviour of the financial services sector and to deliver six improved outcomes for consumers.

Question 12

What are the deliver 6 improved outcomes the Treating Customers Fairly (TCF) initiative seeks to deliver for consumers?

Answer 12

• Outcome 1: Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture
• Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly
• Outcome 3: Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale
• Outcome 4: Where consumers receive advice, the advice is suitable and takes account of their circumstances
• Outcome 5: Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and as they have been led to expect
• Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint

Question 13

What is the likelihood of an adviser having total knowledge and experience to answer all client questions?

Answer 13

Unlikely!

Question 14

When dealing with clients, if a situation arises that goes beyond the adviser’s knowledge and experience, what should the adviser do?

Answer 14

They will need to refer to specialists in that area. These specialists are likely to come from within the firm, and advisers must take advantage of these specialist sources of information.

Question 15

List 8 examples of hard facts.

Answer 15

1. Full name(s)
2. Date(s) of birth
3. State of health
4. Marital status
5. Residence and domicile status
6. National insurance number(s)
7. Address
8. Employment details
9. Family details

Question 16

What else should an advisor do in addition to collecting hard facts?

Answer 16

The fact-find process should involve the advisor listening to the client and asking questions to form a better understanding of exactly what the client is trying to achieve. This information can only be collected face-to-face, and by the advisor asking open questions of the client and listening carefully to the replies.

Question 17

What are some things an advisor should listen out for when speaking to a client face-to-face as part of the fact-finding process?

Answer 17

During these discussions, the advisor may elicit the client’s aspirations or expectations that have no basis in fact. These would be soft facts and could include the client’s feeling on their current spread of investments or their opinions on how future events may affect their decisions.

Question 18

What is a ‘letter of authority’ and when is it needed?

Answer 18

Many clients will not have the necessary details within their own files, and it is, therefore, necessary to collect information from relevant third parties. This may be down to a lack of access to the information or maybe the client is uncomfortable with discussing the topic directly with the third party and would prefer the adviser to collect the information. The advisor will need a ‘letter of authority’ from the client which authorises the third party to release information regarding the client to the advisor.
 

Question 19

What does the Investment Policy Statement (IPS) do?

Answer 19

The Investment Policy Statement (IPS) summarises the client’s investment needs and wants into clear objectives and details any investment constraints.

Question 20

When is an Investment Policy Statement (IPS) formulated?

Answer 20

An Investment Policy Statement (IPS) is formulated for each client at the start of the advisor/client relationship.

Question 21

How is the Investment Policy Statement (IPS) formulated?

Answer 21

It is developed after a thorough fact-find process.

Question 22

What are the 7 things an Investment Policy Statement (IPS) assess?

Answer 22

1. Risk objective – how much risk the client is willing and able to take
2. Return objective – the required return needed from the portfolio
3. Liquidity needed – at what points withdrawals are intended e.g. a regular income
4. Time horizon – how long the funds are to be invested
5. Tax – the tax position of the investor
6. Regulatory issues – trusts, charities and pension funds have regulatory constraints
7. Other unique circumstances – investor preferences and existing holdings

Question 23

What is the procedure for risk and return in relation to the Investment Policy Statement?