CFP Flashcards
6 steps financial planning process
- establish / define client relationship
- collect clients info
- analyse and assess clients financial status
- develop and present
- implement
- review
SMART objectives
- specific
- measurable
- actionable
- realistic
- time-based
Conflicts x 4
- financial gain or prevent loss
- has an interest on outcome
- incentive in favour of another
- receives an inducement
Key reasons why markets and economy move independently x 2
- relative size
- time lag
DOTAS
Disclosure of tax avoidance scheme’s
State triple lock
- CPI
- average earnings growth
- 2.5%
Rule 72 - time to double
72/ rate of interest
Discounting formula
FV = PV x (1 + r)n
PV = FV / (1 + r)n
r = (FV/PV)1/n - 1
n = log(FV/PV)/log(1+r)
Fifth variable
FV= PV(1+r)n + PMT((1+r)n -1 )/r)
Debt to asset ratio
Liabilities / net worth
Current ratio (basic liquidity)
current assets / current liabilites
Liquidity ratio
Liquid assets / monthly expenses
Debt service ratio
Monthly credits payments/ take home
Savings ratio
Savings / gross income
Quick Succession relief
(Gross gift - tax paid on inheritance) / gross gift
X tax paid on inheritance x %
5 years
Furnished holiday let
Available 210 let 105
Over 31 long term no more than 155
UK/ EEA
Relevant for pensions
Cgt rollover, holdover and business asset relief. Defer gains. Iht bus relief after 2 years
Residence ties x 5
- spouse, minor children in uk
- available uk residence for 91 days stayed in 1
- work 40 days in uk
- spent more than 90 days in the UK in either of the past 2 tax years
- spent more time in uk than other countries
UK domicile
15/20 tax years in UK
Remains after leaving UK
6 years for income and cgt
4 years iht
MPT
- Max returns min risk
- risk measured by standard deviation
- diversification is key
- combine negative correlated assets
Standard deviation
1 - 68%
2- 95%
3 - 99%
Sharpe ratio
- compare fund managers
- risk adjusted return
- excess return for every unit of risk
R - rf / sd
Info ratio
- Compare to benchmark
- risk adjusted return
- negative better in a tracker
Rp - Rb / tracking
Interest / running yield
(Coupon / price) x 100
Gross redemption yield of bond
Calculate interest yield
Then
(Profit (or loss) to redemption / years)/ clean x 100
Add together
Interest payment types for bonds
X 9
- floating rate
- step up
- credit linked
- payment in kind
- differed
- index linked
- zero coupon
- dual currency
- fixed
AER of bond
AER =
[1+(flat rate/n)]^n - 1
Modified duration
Md = macaulay/ (1+r)
Costs of buying selling shares
Buying
Commission and broker
Panel and takeover levy £1 over 10k
Private equity paper Stamp duty 0.5% above 1k to nearest £5
SDRT on all to nearest 1p crest aim exempt
Selling
Commission and broker
PTM
CGT
Types of preference share x 4
Cumulative
Non Cumulative
Convertible
Participating
Dividend yield
Net div per share / current price
X 100
EPS Earnings per share
Profit to ordinary / no of shares
Dividend cover x 2 equation
EPS / div per share
Or
Profit to ordinary / total div paid
Price / earnings ration P/E
Market price / EPS
NAV
Net assets for ordinary / number of ord shares
Net assets = assets - liabilities - pref shares
Interest cover
Earnings before int and tax / interest
Price to book ratio
P/B
share price / equity book(assets - liab)
P/E to growth PEG
P/E / earnings growth
1 or below or over priced
EIS
Tax free in product Dividends taxable CGT free if held 3 years 30% tax relief max cont £1mill Relief carried back 1 year max Unlisted Qualifying trade Gross assets must not exceed 15mill /16mill after Fewer than 250 employees IHT exempt after 2 years Max raise 5mill py or 12 lifetime
SEIS
tax free in product Dividends taxable CGT free after 3 years 50% tax relief up to £100k Fewer than 25 employees UK based Under 2 years old Trade in approved sector Not raise note than 150k via seis No more than 200k gross assets Not controlled by investor receiving their capital Investors can't have more than 30% CGT - no deferral. 50% exempt
VCT
Income tax free
CGT free
30% tax relief on £200k
Held 5 years
- listed on stock exchange
- income must be from shares / securities
- 70% qualifying holdings
- not more than 15% in one company
- at least 30% of qualifying holdings must be new ordinary shares and at least 10% per company
- cannot invest more than £1m in any single qualifying conpany each year
- not exempt from IHT
What is an ETF
- Trades like a normal share on LSE
- invests in diversified mix
- low cost
- shares / commodities/ fixed income
- liquid
- diversification
- no stamp duty
Types of etf
8 + 2
- index
- commodity
- bond
- currency
- actively managed
- hedge fund
- leveraged
- smart beta
- physical / synthetic
Hedge funds
Unconventional investment styles
- long / short
- relative value - price anomalies/ arbitrage
- event driven
High costs
Little regulation
High entry levels
3 principles of money management
- save and invest
- plan for future
- budgeting and debt man
Market value of property equation
Value = NOI/(r-g)
NOI -net operating income
r - required return on real estate
g - growth rate applicable to NOI
REITS
- closed ended
- listed on recognised exchange
- uk resident
- 1 class of share
- 75% profits from rental
- at least 3 properties
- min interest cover 1.25
Ring fenced property let
- exempt from corporation tax
- 90% rental profits paid 12 months
- payments paid net 20%
Non ring fenced
- subject to 19% corporation tax
Property Authorised investment funds (PAIFs)
- can invest in uk and non UK reits
- rental income exempt from tax in fund
- dist net basic tax
- other income 20% Corp tax
- OEIC
- 60% from exempt property business
- property must be 60% of assets
- shares widely held and no corporate can own more than 10%
IPS
Investment policy statement content
X5
- clients background and circumstances
- risk and return objectives
- portfolio constraints
- operational guidelines for constructing a portfolio
- guidelines for monitoring and review
Wol
X4
- non profit
- with profits - reversionary / terminal bonus , MVRs
- low cost
- unit linked - reviews 10 then 5
Term assurance
X7
- level term
- increasing term
- renewable- no more uw
- convertible - wol / endowment
- decreasing
- family income benefit
- unit linked - sell units to fund life
Life assurance qualifying rules
X6
- min 10 years or 3/4 term
- premiums paid at least annually
- min life assurance of 75% of premiums
- no premium more than double any other
- no premium more than 1/8 of total premiums paid
- max 3600 per annum
Quick Succession relief
(Gross gift - tax paid) / gross gift
X tax paid x %
Business relief
100%
- interests in unincorporated business
- shareholding in unquoted or AIM
50%
- shares controlling more than 50% voting rights in fully listed company
- land, buildings, plant and machinery used for business controlled by donor
Needs to have owned for 2 years
Discretionary trust tax
£1000 standard rate 7.5 % / 20 % 38.1% / 45% CGT £6,150 Expenses can be relieved Must make sure enough in tax pool 30% of trust charge 20% = 6% 10 year Exit x/40 3 month periods x 30% of effective rate Stamp duty add 3% Cost are grossed up
Diff between financial and money management
Financial - management of financial assets
Money - involves managing both financi and non financial
Networth statement
Summary of capital resources available to achieve goals
Duty of care x 7
1- behave like a fiduciary - best interest
2- act in accordance with professional expectations
3- full and appropriate disclosure
4- act with transparency
5- manage conflicts of interests
6- secure fully informed client consent
7- communicate the remuneration model
Risk profiling x 3
- psychometric tests
- stochastic modelling
- scenario based models
Objectives should be
X 2
- quantified
- qualified
3 financial management statements
- net worth
- income tax
- income and expenditure
Financial life cycle
- wealth creation
- retirement
- legacy planning
Conflicts of interest x 4
- financial gain or avoid a lossat expense of a client
- interest in the outcome of the service or transaction carried out distinct from clients interest
- financial incentive to favour a or group of clients
- relieves inducement such as money or services other than standard commission
Lifetime isa
- £4000 pa
- 25% bonus annually
- 18-39
- receives bonus on contributions to age 50
- retirement or first property
- 25% penalty If withdrawn before 60
Pension tapered allowance
Threshold income 200k
Adjusted income 240k
Iht excemptions x 11
- spouse / civil partner - unlimited exempt during life and death. Non domicile restricted to 325k. Could elect to be domiciled
- 3k annual
- 250 small gifts
- 5000 parent wedding
- 2500 grandparent
- 1000 anyone else
- gifts for maintenance/ education
- normal expenditure from income
- national benefits
- armed forces
- charity
Business asset disposal relief / investors
- sells shareholding in business min 5%
- held min 2 years
- £1,000,000
- 10%
- sells shares in unlisted companies
- no employees or remunerated director
- min years
Benefits of financial planning x 10
- peace of mind
- security
- clarity
- organisation
- professional relationship/ expertise
- efficiency
- improved knowledge
- help with decision making
- ongoing reviews
- enhanced understanding
Factors that affect emergency fund
X 7
- security of income and ease to replace
- expenditure levels
- protection provisions
- access to other capital or income
- age
- attitude to risk
- level of income
Processing data is lawful if at least 1 x 6
- data subject has given consent
- necessary for a contract
- legal obligation or compliance
- necessary for vital interests
- to complete a task in the public interest
- interest by data controller
Ethical considerations x 5
- conflict of interest
- limits of authorisation
- limits of competence
- clients mental capacity
- clients vulnerability
Key points on net worth statement x 5
- date
- name of client
- assets grouped to identify sow
- liabilities are detailed
- explanatory notes
Factors causing increased financial planning x 8
- increase longevity
- lifestyle changes
- pension complexity
- legislation changes
- need for care
- generational planning
- low return environment
- financial awareness
What hinders effective money management x 8
- desire for instant gratification
- present rewards more attractive
- difficult to relate to future
- lack of financial literacy
- debt / overspending
- no savings / emergency fund
- not budgeting
- no protection against catastrophic events
What duty of care x 7
- behave like a fiduciary
- act to professional expectations
- full and appropriate disclosure
- transparent
- manage conflict of interest
- secure client consent
- communicate charges
Principles of processing data x 6
- consent
- accuracy
- storage limitation
- integrity
- confidentiality
- accountability
3 principles of money management
- save and invest
- plan for the future
- budgeting and debt management
Financial planning if health deteriorated x 5
- will
- LPA
- IHT planning
- care fees planning
- dispose of assets to reduce admin
3 ways to manage a conflict of interest
- open discussion about the conflict
- provide options
- resolve before proceeding
Cognitive errors x 6
Arise from faulty thinking due to incomplete information, inability to analyse
- confirmation bias - evidence
- conservatism bias - new info
- hindsight bias - false confidence
- anchoring
- mental accounting
- framing bias
Emotional biases
Personal feeling affect judgement
- loss aversion - more risk to reduce loss
- over confidence
- anchoring - stick to original estimates
- regret aversion
, endowment - value more when we contril
Investment policy statement x 7
Documents between portfolio manager and client outline general rules for the manager
- Understand clients circumstances/goals
- Purpose of portfolio
- Risk and return expectations
- Time horizon
- Diversification policy
- Rebalancing and review
- Investment philosophy
UK residence test
No
- less than 16 days or 46 if not been classed as resident for 3 years
- work full time abroad, in uk less than 91 days and worked less than 30
Yes
- 183 days or more
- only home is in uk spent at least 91 days there of which 30 this tax year
- work full time in the uk
Purpose of a financial plan
Comprehensive picture of assets, goals , strategies
Road map, needs objectives, available resources, required risk and actions
Characteristics of a financial plan
- SMART
- Written
- identify obstacles and ways to overcome
- time bound
- regular review
- dynamic / flexible
Process of financial plan x 6
- net worth statement
- income and expenditure statement
- rpq and cfl
- cashflow modelling
- recommendation
- action plan
3 stages of life
- foundation
- accumulation (early and late)
- maintenance
Domicile status
- origin
- dependency
- choice
- deemed
Personal risk management x 5
- human capital (present value of future earnings)
- financial dependents
- mortgage on family home
- low financial resilience
- asset protection
Methods of life insurance calculation x 4
- rule of thumb - multiple of earnings
- human capital approach
- capital retention (net worth)
- needs approach
3cmost important insurance fir family with dependents
- term life insurance- debts
- income protection
- family income benefit
Purposes of a trust x 4
- safeguard wealth for minor
- protection of assets ( separate, bankruptcy)
- life policies pay out maximum
- ensure benefactors wishes are done
Child benefit
- £21.15 21.05
- £14 13.95
Married couples allowance
£353 - £912.50
Purchased life annuity
- must be grossed up
- then tax deducted as done from source
Maximum interest that can be deducted
Higher of 50k or 25% net adjusted
Key investment risks of AIM shares x 5
- liquidity
- diversification
- event risk
- regulatory risk
- taxation / legislation - reliefs
3 key areas in discovery meeting
- whether financial planner can help
- identify any conflicts of interest
- scope of engagement
3 types of savings
- contractual
- discretionary
- residual
Efficient frontier limitations x 5
- assumes SD is sound risk indicator
- difficult to consider SD with risk profile
- assumes normally distributed returns
- historic data
- transactions cost excluded
CAPM
Equation + 8 assumptions
R = Rf + B(Rm - Rf)
- rational and risk adverse
- decisions made on risk and return alone
- all have same holding period
- many buyers and sellers
- noone can affect price
- no taxes, costs or restrictions
- info is free and widely available
- unlimited funds can be borrowed at Rf rate
Income protection types x 5
- standard
- limited term
- day one / back to day
- investment linked
- unemployment policies
Human capital
Present value of future earnings
Utility
Satisfaction
U = Er - 1/2Aó2
O2variance
A Aversion factor
Auto enrolement x 6
- Enrol every 3 years
- 22 years to state
- trigger 10k
- work in uk
- can ask if earn above low earnings
- 8 % (3 employer)
AER equation
AER= (1+ r/n)n - 1
Life cycle
Borrowing
Accumulation
Decumulation
Fees x5
- fixed/ flat fee
- %
- hourly
- mix
- commision
