Chapter 1 - Understand How To Establish And Meet A Clients Investment Objectives

Question 1

Breakdown the Investment Advice Process

Answer 1

o Establish and defining the relationship between the client and the adviser

o Gathering client data and determining goals, expectations and any ethical issues

o Analysing and evaluating the client’s financial status

o Creating a risk profile in agreement with the client

o Formulating the investment strategy for asset allocation

o Selecting investments, funds and products

o Selecting a choice of wrappers for tax efficiency

o Presenting and implementing recommendations and

o Monitoring the portfolio and when appropriate, rebalancing the portfolio and switching out of underperforming investments.

Question 2

Client Categories

Answer 2

Retail Client
A professional client
and eligible counterparty

Question 3

Firms MUST provide retails clients with the following:

Answer 3

• Name and address of firm including contact details
• Confirmation that the firm is authorised and name and contact details of the regulatory authority
• What languages the client can communicate in
• Methods of communication to be used between the firm and client
• Nature, frequency and timing of reports that are to be provided on the performance of the service the client is receiving
• Conflicts of interest policy
• Nature and type of advice they will provide
• If the advice is independent or restricted
• Annual reviews and when and how often they will be completed

Question 4

Information relating to managing investments

Answer 4

• How often the portfolio will receive a valuation
• Details of the any discretionary management of all or part of the investments/funds
• Benchmark performance of the portfolio will be compared against
• Type of investment and transaction types that may be carried out including limits
• Clients’ investment objectives, level of risk that the DIM can use at their discretion

Question 5

Disclosure of costs and charges

Answer 5

• Total price to be paid including fees, commissions, charges and expenses (any taxes paid by firm)
• If they can be provided a timeline of when the client would receive these and how frequently
• The commissions charges by the firm, must be itemised separately for every case
• If costs and charges are paid in a foreign currency the rates used, costs to complete and currency involved
• Any additional costs and taxes that could arise
• How the above are paid or charged
• Information on the compensation schemes (FSCS)

Question 6

Client Agreement ensures the client has an understanding of?

Answer 6

• Amount of reporting on investments
• Frequency of reviewing the clients circumstances and plans
• Whether the adviser will alert the client of any changes to their plan that might be needed in future.

Question 7

Data Protection Act 2018

Answer 7

Allowing individuals the right to have their personal data removed or transfer to another organisation

Report a breach within 72 hours of becoming known

Introduction of the statutory role of data protection officer (DPO)

Question 8

Vulnerable Clients might have the following

Answer 8

• Physical disability
• Poor mental health
• Compulsive or impulsive behaviour
• Impaired cognitive skills due to illness or ageing
• Bereavement, divorce, care home

Question 9

Trusted Adviser Status

Answer 9

Trust in technical competence and know-how – clients seek advisers who are experienced and able to help them with difficult financial and personal decisions

Trust in ethical conduct and character – Clients look for someone they can trust and understand their problems and offer solutions

Trust in empathic skills and maturity – clients want to feel confident they can trust the adviser

Question 10

Information Required at a Fact-Find

Answer 10

• Personal information
• Needs and objectives
• Assets and liabilities
• Income and expenditure
• Priorities
• Attitude to risk

Question 11

What is SMART?

Answer 11

S – Specific – We want to retire at age 60.

M – Measurable – We would like to have a retirement income of £24,000 a year.

A – Action-related – By increasing the level of savings or making lump sum contributions.

R – Realistic – We can afford to save this amount each month.

T – Time-related – The fund should be atleast £400,000 in 8 years’ time.

Question 12

What is a Risk Assessment

Answer 12

Risk Tolerance – Client’s willingness to accept investment fluctuation

Risk Perception – Client’s personal opinion on the risks, based on prior experience and knowledge

Risk Capacity – Client’s ability to absorb financial losses

Question 13

Explain what Critical Yield is?

Answer 13

Rate of return needed to meet the objective, based on given level of investment is often described as the critical yield.

• Higher degree of risk, more fluctuation in the fund,
  more risky strategy
• Lower degree of risk, less investment movements, more safe but lower growth

Question 14

What is Stochastic Modelling?

Answer 14

The aim is to predict probable outcomes for different investments depending on a range of assumptions. The word “stochastic” means having a chance or random element and is also referred to as the Monte Carlo simulation

Question 15

Sustainable and ESG Investment Approach

Answer 15

1- Positive selection – Directs managers to invest in assets that meet specific published policy requirements.

2- Negative exclusion – Direct fund managers to avoid particular sectors or behaviours.

3- Responsible ownership – Asset owners encouraging companies to have a higher ESG standards.

Question 16

How do you analyse a clients financial position?

Answer 16

Synthesis – bringing together information for a clear summary for the main aspects of a clients financial position.
- Personal Details
- Health Status
- Family and Dependants
- Occupation, earnings and income sources
- Outgoings (now and in future)
- Assets and Liabilities
- Pension arrangements
- Potential IHT, Will POA etc

Analysis – Reviewing the strengths and weaknesses in the current situation whilst identifying shortfalls in the clients needs and wants.
- Cash flow statement
- Net assets statement
- Tax position
- Lifetime cash flow projections

Prioritisation – Prioritising the objectives whilst making amendments to the clients objectives to ensure they are realistic to achieve.

Question 17

Why is three-month volatility a relatively unimportant measure of risk for investment strategies with a 20-year horizon?

Answer 17

The longer an investor can hold onto the volatile investments such as shares of property, the greater the likelihood will be that they can ride out cyclical or other short-term downturns.

Question 18

Why is it a good idea for investors to keep some of their investment portfolio in a liquid, easily accessible form?

Answer 18

There are two reasons why liquidity within a portfolio can be advantageous;

Client may have unexpected needs for cash, which could results in serious capital loss if market prices are low.

It enables clients to take on opportunities, such as adding to holdings, at times of distress or panic-selling.

Question 19

If a client is savings for retirement in 15 years time, explain why they are more likely to have a higher proportion of their portfolio in equities than short-dated gilts?

Answer 19

This is a relatively long time horizon and there is no mention of liquidity requirements, so it is likely that they client is willing to tolerate a medium or high level of risk in the portfolio. In this case, equities are a more appropriate investment than short-term gilts.