8) other areas of financial services

Question 1

what is fund management?

Answer 1

• where a firm creates an investment fund for its clients, which enable them to invest together, so that they can all share in gains and losses together
• decisions of where to invest are made by the fund management firm

Question 2

what is foreign exchange?

Answer 2

• the exchange of foreign currency as a result of international trade or travel
• the money held by one party needs to be exchanged into another currency before the transaction can be completed

Question 3

what is insurance?

Answer 3

• method of managing risk if something happens e.g. health insurance policy ensures that a company may be required to pay for a treatment of a serious illness

Question 4

what is financial planning?

Answer 4

• providing assistance to families or businesses in organising their financial affairs to achieve their financial and lifestyle objectives
• includes retirement planning

Question 5

what is estate planning?

Answer 5

• contemplating how assets, such as investments and property, on death, will be distributed in accordance to someone’s will

Question 6

what is fintech?

Answer 6

• financial tech: growing industry of technology in banking

Question 7

what is a collective investment scheme?

Answer 7

• where a firm creates an investment fund for its clients, which enable them to invest together, so that they can all share in gains and losses together
• decisions of where to invest are made by the fund management firm
• known as a CIS since the clients are investing together

Question 8

why may an indirect investment into a fund be a better option than a direct investment?

Answer 8

• indirect investment allows for diversification and gaining shares in multiple companies, rather than just one thanks to the shared investment fund so that if one goes bad then you can depend on another
• diversification is an advantage because the fund invests in a variety of shares with the huge collective fund -> not confining one’s investments and broadening them instead
• investors are effectively able to buy portions of individual shares
• increased expertise from the fund manager, who is a professional that will choose the strongest investments

Question 9

what are cryptocurrencies?

Answer 9

• virtual or electronic currencies that use encryption technology, to control the amount of currency issued as well to record ownership and payments
• bitcoin (2009)
• people have to set up digital wallets, where they can securely store their tokens

Question 12

How are tokens gained in cryptocurrency?

Answer 12

-purchasing them in exchange for more traditional currencies like the dollar
- earning them through doing tasks that pay users in crypto
- crypto mining - solving mathematical problems to generate new cryptographic keys

Question 13

What are the disadvantages of cryptocurrency?

Answer 13

• while they may go up in value, they are also high risk and speculative - not uncommon for them to fluctuate drastically in value; this is driven by many factors

Question 14

What is insurance?

Answer 14

• a safety net just in case something happens e.g. driving, life, health insurance and corporate (for businesses)
• the insurance policy by a company that covers the cost is an insurance PREMIUM
• the monthly payment for that insurance is called the insurance premium PAYABLE

Question 15

How does syndication work in insurance?

Answer 15

• when insurers group together to enable them to underwrite substantial risks like insuring a HUGE shipping company
• they aim to spread the risk around insurance companies, which allows insurance companies to take on the largest, most expensive risks

Question 16

What are the two vital subsets of financial planning?

Answer 16

• planning for someone’s retirement - retirement planning
• planning for how assets are left behind when an individual dies are distributed - estate planning

Question 17

What are the three sources of pension?

Answer 17

• personal pension => provided by the individual in the form of savings (?) put into a personal pension scheme, which are made available by banks and involve putting a portion of their monthly salary into it AND then that is invested in various shares => leading to potential growth in value
• state pension => provided by the state (taxpayers) but a pension cannot be entirely dependent on this. UK’s max state pension is approx 175 per week
• employer-sponsored pension => provided by the individual’s employer - either fully funded by the firm or contributory

Question 18

What is the longevity issue?

Answer 18

• as people now live longer, due to medical and social advances, how will their need for a larger pension be financed?
• the funding needed for the same level of pension will increase => either pay more into pension, work for longer or retire later
• or employers pay more = affects profitability = later retirement
• state: longer life = more needs to be spent by the state = higher tax collected from the working population to pay for the pensions of people living for longer

Question 19

How does estate planning work?

Answer 19

• concerned with taking steps towards ensuring that someone’s accumulated wealth goes to the intended beneficiaries and does so in tax efficient way -> who inherits and how to reduce estate taxes
• dependent on jurisdictions, there is sometimes complete freedom to who an estate can be left to but in others, certain people have rights to a specific portion of the state

Question 20

How is a client’s estate assessed?

Answer 20

• looking at the extent client’s assets and liabilities e.g their property, savings, and investments
• any other funds that would become payable if they die like life life assurance policies
• should also take into account of any protection policies like mortgage protection

Question 21

what three other things needs to be considered during estate planning?

Answer 21

• whether a power of attorney is necessary to protect the individuals’s interests when they are incapable of doing so
• whom they wish to inherit their estate and any gift they want to make
• the extent of any liability to inheritance tax or estate duties that may arise, and whether action should be taken to mitigate this

Question 22

what is the power attorney?
when can they be executed (designated)?

Answer 22

• legal document that authorises someone to undertake a specific transition or for someone to manage their affairs
• one can assign this person when they are of sound mind. so when this is no longer the case, the attorney will make decisions on their behalf => it could be family, or a lawyer
• if this isn’t arranged beforehand, someone has to apply to the courts to have the authority to act

Question 23

what is a will?

Answer 23

• a legal document that dictates what is to happen to someone’s estate in the event of deat. often, an individual designs their own will to ensure that their assets are distributed in accordance to their wishes
• an essential document, esp for a young family - in case something fatal happens and the children need to be taken care of

Question 24

what happens if no will is made?

Answer 24

• then the legal system determines who inherits
• known as dying intestate (without a will) and a set of intestacy rules determine who is to inherit

Question 25

what are the different type of collective investment platforms?

Answer 25

- low cost investment platforms - premium platforms - robo advisors

Question 26

what is crowdfunding?

Answer 26

- the practice of funding a project by raising small amounts of money from a large number of people via the internet - seeking donations from people that believe in the cause - no possibility of return for the investment - debt crowdfunding where the investors receive their money back with interest - equity crowdfunding - where people invest in exchange for equity or shares

Question 27

what is peer-to-peer finance?

Answer 27

- type of business loan where a large number of private investors lend to a business, usually through an online platform. - the idea is that both the lenders and the borrowers get a better rate than they would through the banks.

Question 28

how have the stock markets been impacted by fintech?

Answer 28

- electronic SE trading systems have enabled transaction costs to be reduced , and opened up the possibility of high-frequency trading, HFT - where people automate their transactions using algorithms that act on signals and trends - HFT is used by large global investment banks that combine large order volumes and rapid execution to beat the crowd

Question 29

what is distributed ledger technology (DLT)?

Answer 29

- replacement of one centralized ledger of transactions with a decentralized network of computers 'nodes' holding copies of it - any changes to the ledger must be done using a consensus algorithm EXAMPLE: blockchain - bitcoin is a public system that uses blockchain DLT

Question 30

what are the advantages of DLT?

Answer 30

- produce a trustworthy and reliable record. since consensus is required for any changes to be made - prevent any single point of failure in any one of the nodes from creating a wider problem - because the remaining nodes hold copies of the valid ledger - difficult to hack due to use of multiple nodes - removes the delays and costs of maintaining a single, central database