9 The investment advice process

Question 1

What does COBS require, regarding suitability of recommendations?

Answer 1

Firms must take reasonable steps to ensure any recommendations are suitable

Question 2

What are the components of the Consumer Principle?

Answer 2

1. Act in good faith
2. Avoid foreseeable harm
3. Support customers’ objectives

Question 3

What is the first step of establishing a client relationship?

Answer 3

Scope of services + costs

Question 4

What is the typical starting point for a risk profile?

Answer 4

Questionnaire using hypothetical questions

Question 5

What are the three components of a risk profile?

Answer 5

1. Attitude to risk
2. Tolerance of risk
3. Capacity for loss

Question 6

What should happen once you’ve established a risk profile?

Answer 6

The client must accept it in writing

Question 7

Is it possible to have separate portfolios for different objectives?

Answer 7

It’s technically less efficient, but possible, if it’s what the client wants

Question 8

What are two ways of controlling a portfolio’s risk/reward ratio?

Answer 8

1. Asset allocation
2. Selection of investments within asset class

Question 9

What does SRI stand for?

Answer 9

Socially responsible investment

Question 10

What does ESG stand for?

Answer 10

Environment, social & governance

Question 11

Which should you select first: investments or vehicles/tax wrappers?

Answer 11

Investments first

Question 12

What does a platform do?

Answer 12

Allows a single set of investments to be held across several wrappers

Question 13

What are four types of investment objectives?

Answer 13

1. Capital preservation (real terms)
2. Capital appreciation
3. Current income
4. Total returns

Question 14

What is an advisable amount for a rainy day fund?

Answer 14

Income for 6-9 months

Question 15

What does MSCI stand for?

Answer 15

Morgan Stanley Capital International

Question 16

What does PIMFA stand for?

Answer 16

Personal Investment Management and Financial Advice

Question 17

What are the MSCI PIMFA Private Investor Indices for?

Answer 17

Benchmarks for evaluating performance of different investment strategies

Question 18

What is tactical asset allocation?

Answer 18

Varying an asset class within its strategic range OR selecting assets within a class

Question 19

Why are significant variations to asset allocation generally only used for growth portfolios?

Answer 19

Changes interrupt income flow

Question 20

What is an example of rebalancing a portfolio?

Answer 20

If equities started at 50%, but good returns mean they’ve risen to 70%, you should sell some & buy other classes

Question 21

What is a guideline safe withdrawal rate for someone retiring at 60?

Answer 21

4%

Question 22

What is sequencing risk?

Answer 22

Withdrawing from a fund during/after market downturn