Chapter 1 - Financial Planning

Question 1

What are the 6 steps for Financial Planning?

Answer 1

1. Establish and define the relationship with the client
2. Collect relevant client information including goals, objectives and priorities
3. Analyse the client’s financial situation
4. Develop financial planning recommendations and present them to the client in a written report
5. Implement the recommendations
6. Review progress and modify as necessary

Question 2

What is the difference between financial planning and financial advice?

Answer 2

Financial planning is a process that evolves over time.
Financial advice is a recommendation at a fixed point in time.

Question 3

What 6 elements should a financial plan include?

Answer 3

1. state the current position of the client
2. evaluate the current financial position, including assets and liabilities, income and expenditure
3. state what the client’s goals and objectives are by time frame
4. demonstrate any shortfall between the client’s objectives and any existing provision they have in place
5. recommend solutions to make up the shortfall and achieve stated objectives
6. highlight any disadvantages of the plan, such as increased costs, and any additional risks.

Question 4

How often should client reviews be?

Answer 4

Every year

Question 5

Who in a financial advisory firm needs to be registered as approved persons with the FCA?

Answer 5

Staff who also hold senior management or significant influence functions within the firm will still need to be registered with the FCA under the SMCR. Examples include directors, partners, compliance officers, money laundering reporting officers and senior finance, risk and audit staff.

Financial advisors DO NOT NEED to be registered as approved persons

Question 6

How much CPD do financial advisors need to undertake per year?

Answer 6

35 hours (structured and unstructured)

Question 7

How much CPD do pension transfer specialists need to undertake per year?

Answer 7

15 hours

Question 8

What is the regulatory complaint process for clients?

Answer 8

Tthe client should first complain to the firm and then subsequently, if necessary, to the Financial Ombudsman Service (FOS)

Question 9

What are examples of hard and soft facts about clients?

Answer 9

Hard facts: Age, Income, Marital Status, Expenditure
Soft facts: Personal Objectives, Attutude for Risk, Capacity for Loss

Question 10

What is a vulnerable customer?

Answer 10

‘Someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care’

Question 11

What is hindsight bias?

Answer 11

The tendency for clients to look back at past events, specifically those which have caused them financial loss, and convince themselves that events which could not have been foreseen at the time were, in fact, obvious and that they ought to have seen them coming.

Question 12

What is anchoring in investing?

Answer 12

Clients holding onto underperforming investments for too long, especially when they have lost money.

Question 13

What is comfirmation bias?

Answer 13

Clients with strong beliefs in a particular respect will often tend to place greater weight on evidence and information which confirms those beliefs

Question 14

What is the “endownment effect”?

Answer 14

Clients tending to place more value on assets that they already own than on those that they do not

Question 15

How is “capacity for loss” defined?

Answer 15

A client’s ability to absorb ANY fall in the value of an investment

Question 16

How should soft facts be obtained from clients?

Answer 16

Soft facts need to be carefully extracted using a series of linked questions

Question 17

What is the difference between “Risk Appetite” and “Attitude to Risk”?

Answer 17

Risk appetite can be defined as the amount and type of risk that an investor is willing to take to meet their objectives.

Risk tolerance is the degree of variability in investment returns that an investor is able to withstand

Question 18

What is the difference between “Ijara” and “Murabaha”?

Answer 18

Ijaha is a leasing schemes where things are bought for the customer and leased back to them

Murabaha is used to provide finance on a property by agreeing a price which is more than market value

Question 19

Who requests focused advice, the firm or the client?

Answer 19

Focused advice is focused, at the request of the client, on the provision of personal recommendations relating to a specific need, designated investment or certain assets.

Question 20

What three bodies does the Money and Pension Serice replace?

Answer 20

1) The Money Advice Service – this offers free and impartial information on all aspects of financial planning such as debt and borrowing through to retirement.

2) Pension Wise – this is a free service for those aged over 50 who have a defined contribution pension scheme and need help to understand their options.

3) The Pensions Advisory Service – TPAS provides independent, impartial and free information and guidance regarding pensions to help individuals make informed choices.

Question 21

What is Streamlined Advice?

Answer 21

‘A term used to collectively describe advisory services (such as focused and simplified advice) that provide a personal recommendation that is limited to one or more of a client’s specific needs. The service does not involve analysis of the client’s circumstances that are not directly relevant to those needs’

Question 22

How long is a “Letter of Autority” (to obtain sufficient detail of existing policies) remain in place for once signed?

Answer 22

12 Months

Question 23

What does “SMART” stand for with regard to client objectives?

Answer 23

Specific
Measurable
Achievable
Realistic
Time-related

Question 24

What is the annual exemption from CGT?

Answer 24

$12,300

Question 25

What level is CGT taxed at?

Answer 25

10% for basic rate payers
20% for higher rate payers
(some assets such as second homes are charged 18/28%)

Question 26

What portfolios are typically used for benchmarking?

Answer 26

A model portfolio run by associations such as the Wealth Management Association (WMA) which provide an indicator of the expected average performance of funds with certain degrees of risk

Question 27

How many FCA principles of business are there?

Answer 27

12

Question 28

What types of senior management or people with significant influence need to be registered with the FCA?

Answer 28

Directors, partners, compliance officers, money laundering reporting officers and senior finance, risk and audit staff

Question 29

What are the 4 drivers of vulnerability?

Answer 29

Health, Life Events, Resilience (low income, too much debt) and Capability

Question 30

What is risk tolerance?

Answer 30

the degree of variability in investment returns that an investor is able to withstand

Question 31

What is the lifetime allowance and the tax implications for exceeding it?

Answer 31

£1,073,100. Benefits crystallised in excess of this limit were, until recently, subject to a tax charge of 55% if taken as a lump sum and 25% plus income tax if taken as an income.

Question 32

What is the marriage allowance?

Answer 32

It allows the spouse to transfer unused personal allowance of up to £1,260 for the taxpayer to use in addition to their own. This can, therefore, result in a tax saving of up to £252.