Chapter 11: Financial Advice Flashcards
1
Q
What is Financial Advice?
A
Help given to an individual when a financial adviser considers their financial needs and recommends products to meet them.
2
Q
How much financial advice does an adviser give?
A
They can give advice about an individual’s finances as a whole, or about on particular need they have.
3
Q
What does receiving financial advice entail?
A
Having a face-to-face interview with an adviser, although can be received in other ways.
4
Q
What must an adviser to before giving advice?
A
Should gather info about individual to find out their specific needs and circumstances.
Adviser then uses this info to recommend that they buy particular products; however, must only recommend products that are suitable for the individual.
5
Q
Why’s it important to manage your money?
A
Helps you to stay on top of bills and save money each year.
6
Q
What does budgeting mean to an individual?
A
- Less likely to end up in debt.
- Less likely to be caught out by unexpected costs.
- More likely to have a good credit rating.
- More likely to be accepted for a mortgage or loan.
- Able to spot areas where they can make savings.
- Able to save for planned spending or just for the future.
7
Q
What’s the first step to taking control of finances?
A
Produce a budget, recording areas of income and expenditure over a period of a year.
8
Q
What does a budget make clear to the individual?
A
- Identifies where spending can be cut back on.
- Highlights major areas of expenditure, e.g. mortgage, where shopping around could reduce costs.
- Highlights loans or money owed on credit cards, where it usually makes sense to pay off debt that charges the highest areas of interest first.
9
Q
What key questions do you need to ask yourself when borrowing?
A
- Do you need to spend the money?
- Do you have other ways of financing the purchase?
- Can you afford to pay back the money that you’re planning to borrow?
10
Q
What are the benefits of good debts?
A
Sensible investment in a person’s financial future - should leave them better off in long-term, and shouldn’t have negative impact on their overall financial position.
11
Q
What are negatives of bad debt?
A
Drain their wealth, are not affordable and offer no real prospect of ‘paying for themselves’ in the future.
12
Q
If someone is going to borrow money, and they’re sure they can repay it, what key factors do they need to consider?
A
- How much can they afford to repay each month - affects which borrowing option is best for them.
- What’s the right type of credit or loan for their situation; otherwise they could find themselves paying more than they need to.
- Interest rate and annual percentage rate (APR).
- How much will be repaid in total.
- Any penalties that nay occur for missed or late payments.
- The cost per week or per month and whether this might vary.
13
Q
The type of financial protection required depends on what factors?
A
Number of circumstances including, e.g. requirements and available income.
14
Q
What are the four main areas that might be in need of protection?
A
- Family and personal
- Mortgage
- Long-term care
- Business
15
Q
What does the adviser explore with the client to determine what type of protection is required?
A
What might happen and what the consequences might be. Although no-one can predict the future, it doesn’t prevent us from considering future events and then assessing whether we’re prepared for them. These areas are serviced by a range of protection products marketed by insurance companies.
16
Q
What are the different protection products?
A
- Critical Illness Insurance cover
- Income Protection cover
- Mortgage Payment Protection cover
- Accident and Sickness cover
- Household cover
- Long-Term care
- Business Insurance
17
Q
What’s Critical Illness Insurance cover?
A
Designed to pay lump sum in event that a person suffers from any one of a wide range of critical illness. Illness may force an individual to give up work so could cause financial hardship.
18
Q
What are some of the key features of CII policies?
A
- Critical illness covered will be clearly defined, illness resulting from activities such as war or civil unrest won’t be covered.
- Critical illness is usually available to those aged between 18-64 yrs and often must end before an individual’s 70th birthday. It will pay a lump sum if an individual is diagnosed with a critical illness and will normally be tax-free. The cover will then cease.
- Critical illness cover can usually be taken out on a level, decreasing or increasing cover basis and can often be combined with other cover, e.g. life cover.
19
Q
What is Income protection insurance designed to do?
A
Designed to pay out an income benefit when a person is unable to work for a prolonged period due to sickness or incapacity. Have high use and value considering family would be able to continue to pay bills if main earner were to fall ill.
20
Q
Why are premiums for income protection insurance usually expensive?
A
As they may need to be paid for a significant period of time.
21
Q
What are some of the key features of such policies of income protection insurance?
A
- Circumstances under which a benefit will be payable are clearly defined. Illness/injury is referred to as ‘incapacity’ and insurance policy will define what constitutes this in relation to their occupation.
- Policy provides a regular income after a certain waiting period (deferred period - longer this is the lower the premiums). The income generally represents 50-75% of pre-tax earnings considering state benefits and the fact the income from the policy isn’t subject to tax. Payments will differ or cease on return to work.
- Once a claim is made, the insurance company may extend the deferred period or even decline the claim. The claim won’t be met if incapacity arises as a result or specific situations including, e.g. unreasonable failure to follow medical advice, alcohol or solvent abuse and intentional self-inflicted injury.
22
Q
What’s the relationship between income protection and critical illness insurance cover?
A
They’re complementary in the cover they offer. For most people, an element of each may be required, so some insurance companies offer menu products that allow a combination of covers under one policy.
23
Q
What is Mortgage Payment Protection Cover designed to do?
A
Designed to ensure payments that are due for a mortgage continue to be paid if the borrower is unable to work because of accident, sickness or unemployment.
24
Q
Who offers Mortgage Payment Protection cover?
A
Available from lending institutions, as well as insurance companies, although costs need to be carefully compared. They’re designed to cover short-term problems, e.g. cover costs if an individual loses their job and until they find alternative work, rather than long-term benefits.
25
What are features of Mortgage Payment Protection cover?
Same basic features as other policies, plus further considerations:
* Protection provided will be on a level basis, so regular reviews are needed so that the cover reflects the payments due as mortgage interest rates change.
* Amount of benefit payable can be reduced to take account of income from other sources and there may be limits on the maximum amounts that will be paid. As a result, the amount of benefit paid may not cover the mortgage payments.
26
What's Accident and Sickness cover?
Personal accident policies are generally taken out for annual periods and can provide for income or lump sum payments in the event of an accident.
27
Is Accident and Sickness cover expensive? What detail needs to be looked at when taking the cover?
They're relatively inexpensive, but care needs to be taken to look in detail at the exclusions and limits that apply:
* Amount of cover may be the lower of a set amount or a maximum percentage of the individual's gross monthly salary.
* Waiting period between when an individual becomes unable to work and when benefits start may be 30 or 60 days.
28
Who assesses someone's eligibility for accident and sickness cover?
Insurance company will assess eligibility at the time of the claim and may refuse a claim as a result of pre-existing medical conditions even if they've been disclosed.
29
What are key considerations of household cover?
* Is the cover enough to pay for the complete rebuild of the home?
* To what extent are external features of a house covered, such as walls, gates, drives and pathways?
* What cover is there in case a neighbour sues you for your tree falling on their property or a similar accident?
* What is the extent of cover for personal possessions?
* Is legal cover included?
30
What's household cover?
House and contents insurance.
31
What's medical insurance?
Private medical insurance is intended to cover the cost of medical and hospital expenses. It may be taken out by individuals, or provided as part of an individual's employment.
32
What are some key features of medical insurance?
* Costs that will be covered are usually closely defined.
* There's limits on what will be paid out per claim, or even over a period such as a year.
* Standard care that can be dealt with by a person's local doctor may not be included.
33
What's the purpose of long-term care?
Provide funds that will be needed later in life to meet the cost of care. Need for such policy explained by cost of nursing, but its value to an individual depends on the amount of state funding for care costs that's available.
34
Are long-term care premiums expensive?
Yes - reflects cost of care, and the benefit will normally be paid as an income that can be used to cover the expenditure.
35
What two forms can business insurance protection take?
Liability insurance (e.g. public liability insurance) and indemnity insurance.
36
What are some examples of business insurance?
* Providing indemnity cover for claims against the business for faulty work or goods.
* Protecting loans that have been taken out and secured against an individual's assets.
* Providing an income of the owner is unable to work and the business ceases.
* Providing payments in the event of a key member of a business dying, to cover any impact on its profits.
* Providing money in the even of death of a major shareholder or partner so that the remaining shareholders can buy out their share and their estate can distribute the funds to their family.
37
What is compound interest?
Interest on interest - if you save regularly, savings add up and keep growing, because each time any interest earned on money is paid into an account it will start earning interest too.
38
What does the UK gov't define the term 'saving' as?
Putting money aside without any risk, and usually chance to earn interest.
39
What are some key considerations when comparing returns on different savings accounts?
* Advertised rates don't always represent the true rate actually earned.
* Tax treatment may vary.
* May be minimum or maximum investment amounts which may restrict usefulness of an account.
* Attractive accounts may only be available for funds that are new to that savings institution and not from existing accounts with the same firm.
* There may be penalty charges if withdrawals are made or early encashment is needed, which will reduce returns.
* High quoted returns may only last for a limited period, to be replaced by lower rates. Many top-of-the-table-rates include temporary bonuses for 3, 6 or 12 months, after which time the accounts often switch to uncompetitive rates.
40
What are some key considerations when comparing returns on different savings accounts?
* Advertised rates don't always represent the true rate actually earned.
* Tax treatment may vary.
* May be minimum or maximum investment amounts which may restrict usefulness of an account.
* Attractive accounts may only be available for funds that are new to that savings institution and not from existing accounts with the same firm.
* There may be penalty charges if withdrawals are made or early encashment is needed, which will reduce returns.
* High quoted returns may only last for a limited period, to be replaced by lower rates. Many top-of-the-table-rates include temporary bonuses for 3, 6 or 12 months, after which time the accounts often switch to uncompetitive rates.
41
What does investing involve?
Involves committing money into an investment vehicle in the hope of making a financial gain.
42
Why is investing different from saving?
As it involves greater level of risk, and there's no guarantee of you getting money back. Wide range of investment products available, inc individual savings accounts (ISAs), unit trusts, shares and bonds.
43
How long are investment products for?
Longer term, and generally suitable if individual already has enough cash savings to keep them going for 3 to 6 months.
Typically outperform cash savings over the longer term but, as their value can rise and fall, investors have to be prepared to take on some risk.
44
How are people's demographics changing?
People are living longer due to improvements in healthcare.
45
What's an issue with these changing demographics in terms of income?
To enjoy those extra years of life you'll need a greater level of income to fund it.
46
What is the trend of retirement income?
Declining (becoming modestly adequate) - due to changing demographics and increasing cost of state pension.
47
What is Estate planning concerned with?
Making sure that a client takes appropriate steps to ensure that their accumulated wealth passes to their intended beneficiaries, and in as tax-efficient a method as possible.
Involves determining who is to inherit assets of the client and what can be done to reduce any estate taxes that will arise on client's death.
48
What's the first step in estate planning?
Assess extent of client's assets and liabilities - property, savings, any investments or funds that would become payable if the client were to die (e.g. proceeds of any lif assurance policies or the payment of death benefits if the client is still working.
49
What should the assessment of client's liabilities take into account?
Should also take into account any protection policies that may be in place to meet that liability, such as mortgage protection policy.
50
Clients balance sheet can then be used to direct the client to consider what 3 areas?
* Whether they need to execute power of attorney (POA) to protect their interests when they are incapable of managing their affairs.
* Whom they wish to inherit their estate, and whether there are any specific gifts they wish to make which should be expressed in a will.
* The extent of any liability to inheritance tax (IHT) that may arise, and whether action should be taken to mitigate this.
51
What is a will?
Legal document that specifies what is to happen to an individual's assets on their death.
52
Why should a client write a will?
To ensure that the assets of their estate pass in accordance with their wishes, and should take specialist advice so that relevant laws are taken into account.
53
Why is a will particularly essential for families with young children?
* What happens to children if parents pass?
* Who looks after them?
* Who would invest any money until they came of age?
* What would happen if the children needed some essential expenditure?
54
Why is a will particularly essential for a second marriage?
Partners may wish their assets to be split in precise ways on the death of the survivor.
55
If overseas assets are held, where should wills be written?
Separate wills should be made in each country; generally, these should be drafted by a specialist in the jurisdiction in question.
56
If no will is made, who decides who inherits the estate?
When a person dies without leaving a will, they're described as having died intestate and a set of intestacy rules will determine who is to inherit. These rules may well provide for the estate to pass in a way that the client would not have intended.
57
What is Tax avoidance?
Legal exploitation of the tax system to one's own advantage, to attempt to reduce the amount of tax that's payable by means that are within law, while making a full disclosure of the material information to tax authorities.
58
What is Tax evasion?
Efforts by individuals, companies, trusts and other entities to evade the payment of taxes by illegal means.
59
What does the term 'tax mitigation' refer to?
Used to refer to acceptable tax planning. Minimising tax liabilities in ways that are expressly endorsed by tax legislation.
60
What two systems of taxation are there?
* Worldwide
* Territorial
61
What is a worldwide system of taxation?
Residents of that country are taxed on their worldwide income and capital gains irrespective of where the income or gains arise. E.g. the US has a worldwide-based system of taxation.
62
What is a territorial-based system of taxation?
Residents are taxed only on income and capital gains arising in that country, and income and gains arising outside of that country are not liable to tax.
63
What do some countries do with a territorial tax system?
They adopt the territorial based tax system, however, extend the tax base of residents to include overseas income and gains, but only if such income or gain is remitted to the country of residence.
64
What's a Legal Person?
An individual or an entity that is recognised as having legal rights and obligations, such as having the ability to enter into contracts, to sue, and to be sued. Entities can take many forms such as companies, partnerships and trusts.
65
When do individuals acquire their status as legal persons?
When they're born, but their legal capacity to enter into contracts or otherwise exercise their rights is limited in certain circumstances.
66
When does an individual have the legal capacity to make their own choices and decisions?
A person who is of age and of sound mind, and so can enter into contracts providing that it's not illegal or void for reasons of public policy.
67
How is individuals having legal capacity relevant for a financial services firm?
Relevance is that they can, for example, open accounts, enter into agreements and give instructions to trade with individuals they know are of age and of sound mind.
68
What age is known as a minor in the UK?
Under 18
69
What does it mean for minors enforcing a contract?
They're able to enter into a contract, but is voidable by the minor before they reach 18 and for a short time afterwards - minor can enforce contract but terminate it if they wish subject to some exceptions.
70
What happens to a contract when a minor reaches 18 and ratifies a contract in some way?
It becomes legally binding on both parties.
71
What does it mean for minors opening up accounts?
Banks do offer accounts, but may put additional requirements in place to protect themselves.
72
What is power of attorney?
Legal document that authorises a person who has legal capacity to act on their behalf.
73
What is Ordinary Power of Attorney (OPA)?
Authorises one or more persons, known as attorneys, to make financial decisions on an individual's behalf, or to undertake specific actions.
74
Why would people use OPA?
* If they're out the country and legal documents need to be executed.
* If they're unable to temporarily look after their financial affairs.
75
When does OPA end?
At a specified time or upon request of the donor at an time and will be automatically revoked if the donor loses mental capacity.
76
What must a bank/FI do before accepting any OPA instructions?
Check the document to confirm their authority to act and confirm the attorney's identity.
77
What's Lasting Power of Attorney (LPA)?
If an individual wants someone to act on their behalf, should there come a time when they no longer have the mental capacity to make their own decisions.
78
What are the 2 types of LPA?
1. Financial decisions.
2. Health and care decisions.
79
What must an LPA do before it can be used?
LPA must be registered with the Office of the Public Guardian and a stamped copy of the LPA is then submitted to financial institutions to show that the attorney has the authority to act on behalf of the donor.
80
When does someone need a Deputy to be appointed?
When someone is mentally incapable of managing their financial affairs, and they haven't made an LPA.
81
What does the Deputy Order do?
Sets out the extent of the powers granted to the deputy, which might relate to finances or personal welfare.
82
Who does the Deputy Order need to be registered with?
Registered with banks and other FIs who want to see original document or an official copy certified by a solicitor.
83
What is a Personal Representative?
The person who is responsible for administering the estate of the deceased, collect their assets, settle debts and distribute the balance to beneficiaries.
84
Who can be a Personal Representative?
Executor or Administrator.
85
What does the personal representative have to prove?
That they have the authority to take control of assets.
86
How does the PR prove?
Apply for a grant of representation - either a grant of probate. or grant of letters of administration.
87
What is an executor of the estate?
When the deceased leaves a will, so appoint someone to deal with their affairs on the death. They then apply for a grant of probate.
88
What's an administrator of the estate?
When there's no will left, then no executor names, or if the named executor does not want to act, someone else needs to be appointed to deal with the deceased's affairs. They apply for a grant of letters of administration.
89
How does the grant of probate/grant of letters of administration work?
Legal documentation that bears the seal of the court and formally confirms the appointment of the executor(s) or administrator(s). Once issued, the grant is then registered with each financial institution and is official proof of the appointment of the executor or administrator; allows the firm to now take instructions from them as to how they wish to deal with the assets.
90
What is the person who creates a trust called?
Settlor
91
What is a trustee?
The person settlors give property to, to look after on behalf of others.
92
What is a beneficiary?
Individuals for whom assets are intended to.
93
Where are the terms of a trust set out?
In a trust deed.
94
What terms are in a trust?
Appoint trustees and give them power to manage the trust and invest in assets.
95
How are assets transferred into a trust?
Trustees become legal owners of assets but also continue to hold these terms of the trust for the benefit of beneficiaries.
96
As trustees are responsible for managing the trust and are legal owners of assets, what do they have legal capacity to do?
Enter into contracts on behalf of the trust.
97
As trustees are able to enter into contracts on behalf of the trust, what must financial institutions need to do?
Need to see the trust deed and check the documentation to confirm the trustees' authority to act and confirm their identity before accepting any instructions.
98
What is a company?
Legal entity formed to conduct business or other activities in the name of its members.
99
What does it mean that company's are incorporated?
Companies have legal personality distinct from those of its members.
100
Are companies a separate entity from its shareholders?
It's a legal person in its own right, and is separate from those who own it (shareholders) and those who run it (directors).
101
Who do companies operate through?
Through its directors who are empowered to run it and enterinto contracts on its behalf.
102
Why do financial institutions need to see incorporation documents of a company?
To satisfy itself that the person it's dealing with is a director or is authorised by the board of directors to act.
103
When does a partnership exist?
When 2 or more persons commence in business together with a view to make profit
104
Examples of certain persons unable to form partnerships?
* Charities
* Non-profits
105
Does there need to be a WRITTEN partnership agreement for a partnership to exist?
No, but there'll usually be a partnership agreement that takes the form of a deed setting out the way in which the partnership will operate.
106
Who decides the relationship of partnerships?
Partners have liberty to decided on terms of their own relationship and may choose almost any conditions they wish as long as they're agreed by all partners.
107
What are the 3 types of partnership?
* Conventional partnership
* Limited partnership
* Limited liability partnership (LLP)
108
What is the partnership act for Conventional partnerships?
* Not a separate legal entity from its owners. Partners are responsible for their own and each other's debts.
* Each partner can sue and be sued in their own name.
* Unable to hold land and property in its name and instead any contract is with the individuals forming the partnership.
109
What is the partnership act for Limited partnerships?
At least one partner must have unlimited liability, referred to as a general partner, while others have limited liability.
110
What is the partnership act for Limited Liability partnerships
(LLPs)?
* Corporate version of partnerships.
* LLPs are separate legal entity to its members (the partners) so may hold land and property to its name.
* Have designated partners who are equivalent to company officers.
111
What does the law of agency refer to?
Set of rules designed to ensure the smooth functioning of businesses by setting out the scope of the authority granted to an agent.
112
What is the relationship between a principal and agent?
Function of agent is to create a contract between the principal and third parties or ot act as the representative of the principal in other ways.
113
What is a key point about agents power?
The power of the agent to bind their principal in a contract which the agent makes on their behalf, sometimes without the principal being aware that this is happening.
114
What happens in the agent exceeds their power?
Principal won't be bound and the agent will be personally liable to the third party breach of warranty of authority.
But common law may extend the scope of the agent's authority beyond this to protect an innocent third party.
Thus, the principal will then be bound to the third party, but the principal can sue the agent for overstepping their actual authority, if it is a breach of the agency contract.
115
What two types of property is recognised by law in England and Wales?
* Real property
* Personal property
116
What is Personal Property?
Includes possessions of any kind, as long as they're movable and owned by someone. Includes tangible, e.g. furniture, and intangible items, e.g. shares.
117
What's the main difference between personal and real property?
Real property is fixed permanently to one location. Includes the land and anything that it's built on, and anything growing or under it, e.g. buildings, crops, mineral rights.
118
What happens when a joint owner dies in a joint ownership?
With assets in joint names, the surviving joint owner takes deceased's share automatically. The surviving joint owner needs to register the death certificate with the bank/FIs; this should then transfer the asset into the sole name of the survivor.
119
What is the alternative joint ownership known as?
Tenancy common
120
What's Tenancy Common?
Where an asset is owned by one or more individuals who could own the asset in equal shares or potentially in unequal shares. This could be an asset such as land or simply a bank account that's held in this way for administrative convenience.
121
What's the difference with tenancy common?
If one owner dies, their share of the property does not automatically pass the surviving owner; it would pass to whoever they specified in a will or, if a will is not made, in accordance with rules of intestacy.
122
What's Insolvency?
Where liabilities of a business/individual (i.e. what they owe) exceed their assets (i.e. what they own), or where they are unable to repay their debts as they fall due. Also a term used to describe all types of financial failure.
123
When can an individual be declared bankrupt?
If they owe £5k+ to any creditor.
124
How long does bankruptcy usually last?
Lasts for a year if the individual cooperates with the official receiver or their trustee in bankruptcy.
Also, until you're made bankrupt, bailiffs can still call at your door to attempt to take goods.
125
What are the 2 main processes encountered when companies go bankrupt?
* Liquidation
* Administration
126
What's Liquidation?
Legal ending of a limited company. Following this, a business is removed from official Companies House register ('struck off'). From this point, business ceases to legally exist.
127
Does a companies solvency position stop from them from going into liquidation?
No - solvent and insolvent companies can be liquidated, but the process for doing so differs for each.
128
What happens when a company is in liquidation?
Liquidator sells a business's assets, pay the firm's creditors and distribute any remaining share capital to shareholders.
129
What happens when a company is placed into Administration?
Insolvency practioner/'administrator' is appointed to take control of the company. The administrator will devise a plan.
130
What does the plan the administrator devise plan to achieve?
Devises a plan to either:
* Restore the company's viability while coming to an arrangement with its creditors.
* Realise the company's assets to pay a particular creditor.
* Sell the business as a going concern on the basis that more money can be made from assets than if the firm were liquidated.
131
What are Scams?
Schemes to con people out of money.
132
How can scams be conducted?
* Post
* Telephone
* Text
* Email
* In person
133
Who should people report a scam to?
They can affect many different types of people, and anyone who thinks they have been a victim of one should report it to Action Fraud.
134
What must a financial adviser have?
* Detailed understanding of myriad of investment products and solutions that are available in the market and of tax implications of investments.
* Knowledge only valuable to client if it's applied within a structured advice process.
* Must take clients circumstances into account in such a way that any recommendations are suitable for their needs.
135
What are the 5 financial planning stages?
1. Determine client's requirements.
2. Formulate strategy to meet client's objectives.
3. Implement strategy by selecting suitable products.
4. Revisit the recommended investments to ensure that they continue to meet client's needs.
5. Periodically revisit the client's objectives and revise the strategy and products held, if needed.
136
What is another important part of financial planning?
Establishing effective relationship with client - only by engaging the client in the financial advice process and ensuring that they fully understand why information is needed and why recommendations are being made that the best results can be obtained.
137
How can the nature of the relationship with the client differ depending on the service provided?
One-off service to satisfy clients needs or long-term relationship where the adviser plays a key role in the client achieving long-term financial objectives.
138
Whatever the service, what's expected of an adviser?
Have fiduciary duty to their client that requires them to observe the highest standards of personal conduct, and fully respect the confidence and trust implicit in that relationship.
139
What are the main responsibilities of an adviser?
* Help clients decide on, and priorities objectives.
* Documenting the client's investment objectives and risk tolerance.
* Determining/agreeing an appropriate investment strategy.
* Acting in the client's best interests.
* Where agreed, keeping products under review.
* Carry out any necessary administration and accounting.
140
What communication techniques are honed by advisers?
* Establish rapport with client.
* Making it clear early on what the purpose of the meeting is.
* Explaining that info collection exercise is to ensure the quality of the advice that will be given.
* Using mixture of open-ended and closed-ended questions to establish the info needed.
* Using everyday terminology and explaining jargon when it has to be used.
* Checking understanding.
* Establishing priorities and getting the client to confirm their agreement.
* Guiding and controlling the pace of the interview.
*Listening.
141
What must a financial adviser do before being able to provide appropriate advice?
Know the customer - get fullest details about the client, not just assets but their life assurance or protection products or arrangements they have in place. Even family and health.
142
What's the purpose of KYC?
To satisfy the requirement to gather sufficient info about the customer - satisfies FCA Principle 9.
143
What's the purpose of gathering info about the client?
So financial plans can be devised and appropriate recommendations made.
144
What types of info should be gathered?
* Personal details
* Financial details
* Objectives
* Risk tolerance
* Liquidity and time horizons
* Tax status
* Investment preferences
145
What's personal details?
E.g. name, address, age, family and dependants.
146
What are financial details?
Income, outgoings, assets, liabilities, insurance and protection arrangements.
147
What are objectives?
Growth, protecting real value of capital, generating income, protecting against future events.
148
What's risk tolerance?
Cautious, balanced, adventurous.
149
What's liquidity and time horizons?
Immediate needs, known future liabilities, need for an emergency reserve.
150
What's tax status?
Income, capital gains, inheritance taxes, available allowances.
151
What are investment processes?
Restrictions, ethical considerations.
152
In order for the adviser to start to identify potential solutions, what do they need to do?
Need to understand what existing assets and liabilities they have before turning to develop a true understanding of what their needs are.
153
What should information firms gather about clients include?
* Client's knowledge and experience in relation to the investment or service that will be considered for recommendation.
* The level of investment risk that the client can bear financially and whether that is consistent with their investment objectives.
154
What should a client's risk profile be based on?
* Risk tolerance
* Attitude to risk
* Capacity for loss
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What is Risk Tolerance?
Client's willingness to accept a certain level of fluctuation in the value of their investments without feeling an immediate desire to sell.
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What is Attitude to risk?
Represents client's personal opinion on the risks associated with making and investment, based on their prior knowledge and experience.
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What is Capacity for loss?
This is the client's ability to absorb any financial losses that might arise from making a particular investment.
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What impact does the risk profile of a client have on financial advice?
Considerable impact on the financial planning strategy that an adviser recommends. It'll exhibit itself in the importance given to financial protection and what's an acceptable selection of investment products.
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What determines a client's ability to take risks?
* Objectively determined by assessing their wealth and income relative to any liabilities.
* Individual psychology - more volatility could mean opportunity for some but distress for others.
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What objective factors help determine a client's risk profile?
* Timescale
* Commitments
* Wealth
* Life cycle
* Age
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What's meant by Timescale as a factor?
Timescale over which a client may be able to invest will determine both what products are suitable and what risk should be adopted.
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What's meant by Commitments as a factor?
Family commitments likely to have a significant impact on client's risk profile. E.g. if client needs to support elderly relatives it'll impact the risk they can assume.
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What's meant by Wealth as a factor?
Wealth will clearly be an important factor in the risk that can be assumed. E.g. client with few assets can little afford to lose them, while those immediate financial priorities are covered and may be able to accept greater risk.
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What's meant by Lifecycle as a factor?
E.g. a client in their 30s/40s investing for retirement will want to aim for long-term growth and may be prepared to accept a higher irks in order to see their funds grow. Might decide to lock their growth when retirement draws closer in order to secure the income that they can live off.
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What's meant by Age as a factor?
Age will be used in conjunction with other factors above to determine acceptable levels of risk.
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What examples are there of subjective factors?
* Client's level of financial knowledge
* Client's comfort with a level of risk
* Client's preferred investment choice
* Client's approach to bad decisions
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Why's the client's level of financial knowledge a factor?
Generally, investors with financial knowledge are more willing to accept investment risk. But this still needs to be tested against their willingness to tolerate differing levels of losses.
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Why's a client's comfort with a level of risk a factor?
Some individuals have a psychological makeup that enables them to take risks more freely than others, and to see such risks as opportunities.
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Why's a client's preferred investment choice a factor?
Risk attitude can be gauged by assessing a client's normal preferences for different types of investments, e.g. relative safety of a bank account versus potential risks of stocks and shares.
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Why's a client's approach to bad decisions a factor?
Refers to how a client regrets certain investment decisions, and is the negative emotion that arises from making a decision that's wrong. Some clients can take the view that they assessed the opportunity fully and therefore any loss is the cost of investing. others regret the wrong decisions and therefore avoid similar scenarios in the future.
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Before a firm proposes to offer investment advisory services/discretionary portfolio management, what must it first assess?
Whether such services are suitable for a professional client or a real client. If it's other investment services, they must ensure they're appropriate for the client.
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In assessing the client's knowledge and experience, the firm should gather info on what?
* Types of services and transactions with which the client is familiar.
* Nature, volume, frequency and time the client has been involved in services/transactions.
* Client's level of education, profession or relevant former profession.
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What's a general requirement for firms giving someone financial advice?
Firm must take reasonable steps to ensure it makes no personal recommendation to a client unless it's suitable for them. Suitability will have regard to the facts given by client and other facts the firms should be reasonably aware of.
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When should a firm provide the client with a report and what should it include?
After assessing what products and services are suitable and appropriate, the firm should provide the client with a report that sets out why the firm concluded that a recommended transaction is suitable.
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What should a firm disclose to clients as well as acting in their best interests?
Ensure they provide sufficient info about their firm and any proposed investments to the client.
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Why is it important that firms disclose 'material information'?
Ensure the client has all the info needed to ensure they're in a position to make a full and informed decision about the suitability of the recommendations being made.
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What's meant by 'material information'?
What counts as this depends on investments and products being recommended, but includes areas such as:
* Charges
* Cancellation rights
* Early encashment penalties
* Risk warnings
* Any special or non-standard terms.
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Examples of scenarios in which disclosure of material information may be relevant?
* Financial planning reports and suitability reports
* Key investor info docs (KIIDs)
* Simplified prospectuses for a mutual fund
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If a firm will be providing ongoing services for clients, what should it provide?
Details about how it will go about managing the client's money and the arrangements it will put in place for safeguarding the client's assets.
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What are consumer rights in financial services dictated by?
By the terms of the contract drawn up between the client and the financial institution - there are rules surrounding unfair terms in contracts and on consumer credit and the right for consumer to change their mind.
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What's the 'cooling-off' period?
Clients who are buying certain investment or insurance products or services are entitled to a period of reflection during which they can decide whether or not to proceed with their purchase.
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What must a firm do if a right to cancel is provided to a client?
Firm must give a clear and prominent notice in writing, either before or immediately after the sale.
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What must they inform the client of?
* Existence of the right to cancel or withdraw
* Its duration
* The conditions for exercising, it including any amount the client may have to pay
* What happens if the client doesn't exercise the right
* Any other practical details the client may need.
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What's the effect if a client exercises the right to cancel?
They withdraw from the contract which s then terminated.
