C5 - Client Advice (15-25 Qs) Flashcards
Which of the following is LEAST likely to affect a client’s risk profile?
A) The timescale of the investment
B) Whether their objective for the investment is income or capital growth
C) If the client is a basic-rate or higher-rate taxpayer
D) The asset allocation of the client’s existing invetsments
C - If the client is a basic-rate or higher-rate taxpayer
The rate of tax paid by the investor on income is unlikely to affect their risk profile, but make hit the net receivable so can come into consideration for different reasons.
Which of the following statements relating to defined benefit (DB) pension funds is correct?
A) A mature fund will have a HIGHER liquidity requirement and thus a HIGHER allocation to short-dated securities
B) A mature fund will have a LOWER liquidity requirement and thus a HIGHER allocation to short-dated securities
C) A mature fund will have a HIGHER liquidity requirement and thus a LOWER allocation to short-dated securities
D) A mature fund will have a LOWER liquidity requirement and thus a LOWER allocation to short-dated securities
A - A mature fund will have a HIGHER liquidity requirement and thus a HIGHER allocation to short-dated securities
A mature fund will need more access to cash to pay a greater proportion of maturing claims, and so it will prefer to invest in short-dated securities.
A client wishes to provide for school fees in two years time
Which of the following invetsments may be the most suitable?
A) Mid-cap equities
B) Commodity futures
C) Commercial property
D) Treasury bills
D - Treasury bills
The client’s investment horizon is too short to include the other, riskier, assets in the portfolio.
The UK gov raises money by issuing bonds: the first type are known as UK Treasury Gilts for longer-term government borrowing and the second are known as UK Treasury Bills (UK T-Bills), for shorter-term government borrowing.
Mid-cap is the term given to companies with a market cap (capitalization)—or market value—between £1 billion and £5 billion.
A commodity futures contract is an agreement to buy or sell a predetermined amount of a commodity at a specific price on a specific date in the future.
Which of the following principles for business would be most relevant in considering the firms obligations towards its customers?
A) Principle 1 - Relations with regulators
B) Principle 3 - Management and control
C) Principle 6 - Customers’ interests
D) Principle 5 - Market practice
C - Which of the following principles for business would be most relevant in considering the firms obligations towards its customers?
A firm must pay due regard to the interests of its customers and treat them fairly.
What is the most important reason for presenting recommendations face-to-face at a client meeting?
A) Signing the forms
B) Verifying status
C) Gather the soft facts
D) Giving the client the report
C - Gather the soft facts
Soft facts are generally obtained in fact-to-face meetings
Which of these securities is MOST likely to meet an investor’s needs to meet regular operating expenses plus unexpected liquidity requirements as they arise?
A) Equities
B) Short term government bonds (UK Treasury Bills)
C) Long term corporate bonds
D) Short term interest rate futures
B - Short term government bonds (UK Treasury Bills)
If an investor has a time horizon of five (5) years it implies:
A) They cannot withdraw funds before five years
B) They prefer funds which will give an optimal return over five years
C) Securities with a maturity of more than five years cannot be purchased
D) The commission charge is only paid after five years has passed
B - They prefer funds which will give an optimal return over five years
3% Treasury 2028 has a gross redemption yield of 5.5%
10.25% Exchequer 2032 has a gross redemption yield of 6.4%
Which of the following investors would you expect to prefer the low coupon stock?
A) UK pension fund
B) Widow on state benefits
C) Company director who earns £110,000pa
D) A high income unit trust
C - Company director who earns £110,000pa
Gilts are exempt from capital gains tax, but coupons are taxed as income. Hence the gilts with the lower coupon attracts higher rate taxpayers.
The gross redemption yield is the rate of interest which, if used to discount future dividends and the sum due at redemption, makes the present value equal to the market price of the stock.
Which of the following statements about pension fund schemes is correct?
A) Defined benefit pension schemes have short term liabilities so they are more likely to invest in short term assets
B) Defined contribution pension schemes bring greater certainty of the amount of pension to be paid on retirement
C) Purchasing an annuity on retirement removes longevity risk for the member of a defined contribution pension scheme
D) There is a greater exposure to longevity risk for members of a defined benefit pension scheme
C - Purchasing an annuity on retirement removes longevity risk for the member of a defined contribution pension scheme
A pension annuity (to give it its full name, though it’s usually just called an annuity) is a product that you can buy once you’re 55 or older (increasing to 57 from 2028). It gives you a guaranteed income unlike, for example, drawdown, which can run out.
What must a firm provide when offering a recommendation to a retail client and as a result they purchase units of a regulated collective investment scheme?
A) Availability report
B) Suitability report
C) Opportunity report
D) Affordability report
B - Suitability report
Which of the following is/are correct regarding defined benefit pension plans?
1. Immature plans have high liquidity needs
2. Liquidity requirements increase as the fund matures
3. Liquidity requirements are dependent on the age of the future beneficairies
A) 1 only
B) 2 and 3
C) 1 and 3
D) All of the above
B - 2 and 3
The need for liquidity will increase as the beneficiaries approach retirement and the fund matures
A middle aged investor with a maturing family now wishes to focus his investments on saving for his retirement whilst still providing protection for his family. He already invests in unit trusts and is a low risk investor
What would you think should be the focus of his investments?
A) With profit bonds
B) Income generating investments such as bonds
C) Investments offering capital growth such as property and equity
D) The ease with which he can switch between one product and another
A - With profit bonds
With profit bond offers a guaranteed capital return plus a share in any profits. It also has a life assured element, should the investor die during the term of the bond thus offering an element of protection for his family.
A with-profits bond is a form of ‘pooled’ life insurance-based investment, and usually requires lump sums to be paid in. A medium to long term investment which means it should be kept for 5 years or longer.
Collective investment products may form part of a recommended portfolio. Which of the following factors is LEAST critical to the fund selection process?
A) The level of annual management charges within the product
B) The past performance of the fund compared with its peer group
C) The quality of customer service given by the product provider
D) The size of the fund
D - The size of the fund
The size of the fund is less important than charges, past performance and customer service in determining fund selection.
The principal-agent problem arises when:
A) Principals and agents are colluding
B) The interests of the principals and agents are aligned
C) The interests of the principals and agents diverge
D) Principals exercise control over the agents
C - The interests of the principals and agents diverge
A young investor approaches you for the first time asking for investment advice. This is the first time she has ever approached an advisor
How would you deal with this investor?
A) Use standard industry terminology and expect her to ask if unsure
B) Have a third party present to write everything down for the investor
C) Assess her level of understanding and meet it with your explanations
D) Tell her that there is a key facts document to read if she has any problems with the terminology
C - Assess her level of understanding and meet it with your explanations
We need to make sure that the advice we give is suitable for and comprehensive to the investor
A financial advisor needs to collect information from a third party
What does the advisor require from the client?
A) Letter of Authority
B) Letter of Acceptance
C) Letter of Acknowledgement
D) Letter of Agreement
A - Letter of Authority
A letter of authority is needed for the provider to release information about the client to the advisor
Which of the following statements is CORRECT about institutions asset allocation?
A) Life insurance funds have HIGHER allocation to equities and a HIGHER allocation to fixed-income securities compared to general insurance funds.
B) Life insurance funds have HIGHER allocation to equities and a LOWER allocation to fixed-income securities compared to general insurance funds.
C) Life insurance funds have LOWER allocation to equities and a HIGHER allocation to fixed-income securities compared to general insurance funds.
D) Life insurance funds have LOWER allocation to equities and a LOWER allocation to fixed-income securities compared to general insurance funds.
B - Life insurance funds have HIGHER allocation to equities and a LOWER allocation to fixed-income securities compared to general insurance funds
Life insurance companies have long-term liabilities so hold more assets that deliver higher returns in the long run, i.e. equities. General insurance companies, however, need to manage cash flows over a shorter horizon (to meet expected claims) and so invest more in fixed inome and cash.
Which of the following statements concerning asset allocation decisions are correct?
1. Asset allocation tends to explain between 85% and 95% of a portfolio’s return total
2. Asset allocation is choosing the asset classes and the proportions each asset class should represent
3. Asset allocation embraces the choice of specific securities within asset classes
4. Asset allocation is typically included in the portfolio’s investment policy documents.
A) All of the above
B) 1, 2 and 4
C) 1, 3 and 4
D) 2 and 3
B - 1 (85-95% return total), 2 (choosing asset classes) and 4 (included in policy documents)
Which two investments are most suitable for a high income earner who does not wish to take an unnecessary risk?
1. Low coupon long-dated gilts
2. Low coupon short-dated gilts
3. Equities with a relatively high P/E ratio
4. Equities with a relatively high dividend yield
A) 1 and 4
B) 2 and 4
C) 2 and 3
D) 1 and 2
C - 2 (Low coupom short-dated gilts) and 3 (equities with a relatively high P/E ratio)
High dividend yield implies a higher income and hence income tax liability. Likewise, for higher coupon bonds.
The price-to-earnings (P/E) ratio is the proportion of a company’s share price to its earnings per share. A high P/E ratio could mean that a company’s stock is overvalued or that investors expect high growth rates.
Zara is 40 years old and is looking to invest for the long term. She is aware that the value of her equity investments may increase or fall in value
With regard to her portfolio, which of the following should you do?
A) Invest in cash deposits
B) Invest in equities to offset inflation risk
C) Invest in fixed income to offset shortfall risk
D) Invest more in cash deposits to offset interest risk.
B - Invest in equities to offset inflation risk
B is the best otion here. Long term returns are possible from equities as they are ‘real’ investments that tend to offset the impact of inflation over time. Zara understands the risks involved.
