Advice and Reccomendations

Question 1

Advantages of Asset Allocation and why it comes before investment?

Answer 1

1. Primary determinant of performance
2. Diversification benefits + match to risk profile (e.g risky client more equities, less cash)

Therefore an agreed asset allocation appropriate to objectives and risk profile is made first, followed by recommendations or ‘fund selection’

Question 2

FSP: One-off charges

Answer 2

Applied at point of sale and / or exit charges if capital withdrawn within certain time frame

Can be charge for investment advice

Question 3

FSP: Ongoing Charges and OCF

Answer 3

Investment and administration costs by fund provider and platform fees where the fund is by a platform.

Some quote an ‘Annual Management Charge’ (AMC) for the investment management services (such as research and portfolio management).

OCF includes costs such as the AMC and extra service charges such as keeping assets safe and calculating fund unit / share price

OFC must be displayed in the ‘KIID’ of a Unit Trust or OEIC

OCF actively managed = 0.75-1.5%
OCF tracker = 0.15%

Question 4

FSP: Additional Trading Costs

Answer 4

• commission to stockbrokers
• stamp duty on UK equities
• performance fee

MiFID II requires additional charges to be seperated from OCF and be reported back to client

More transparency and shows costs were much higher than just OCF

Question 5

FSP: Financial Stability of Provider and Life Assurance Companies

Answer 5

Most important for ‘With-profits’ based investments managed by a ‘Life Assurance’ company.

With-profits funds deliver a ‘smooth return’ in form of bonuses

The provider will put capital into reserves during strong returns and draw on them when the rate of bonus to be paid is higher than the returns achieved

Question 6

FSP: Stability, Independence of Service Providers and Auditors

Answer 6

Service providers (investment managers, brokers etc) should all be independent of each other and external

Well suited auditors should be appointed

E.g Bernard Madoff Investment Securities ponzi

Question 7

Benchmarks and Performance

Answer 7

Absolute return is not a good indicator, managers can be bench marked against managers of similar investments and size

However, neutral, unbiased benchmarks are the best method, such as ‘Market Indices’

Question 8

Need for Reviews and Frequency of Reviews in Financial Planning Process

Answer 8

At least annual check up, to keep clients portfolio in line with their changing objectives.

1. Check for any changes to client circumstances, risk profile and objectives.
2. Monitor investment performance against benchmark - do under performers need changing
3. Rebalance portfolio in line with asset allocation. ‘Portfolio Drift’ may have occurred where portfolio moves away from initial allocation.