Chapter 11: Financial Advice

Question 1

Budgeting

Answer 1

Managing money better can pay off as it can help stay on top of bills and save money each year.

Question 2

Borrowing

Answer 2

Be sure when borrowing. Consider the interest rate and annual percentage rate, how much will be paid in total, any penalties that ku occur for missed or late payments and the cost per week or per month.

Question 3

Protection

Answer 3

4 main types of protection:

Family and personal, mortgage, long term care and business.

Question 4

Critical illness insurance cover

Answer 4

Designed to pay a lump sum in the event that a person suffers from any one of a wide range of critical illnesses.

Available to those between 18 and 64. Ends before 70th bday

• war and civil unrest will not be covered

Question 5

Income protection cover

Answer 5

Designed to pay out an income benefit when a person is unable to work for a prolonged period due to sickness or incapacity. Premiums are relatively expensive. Key features:

• policy provides a regular income after a certain waiting period called the deferred period. The income will generally represent 50-75% of your pre tax earnings considering state benefits and the fact that the income from the policy is not subject to tax.

Question 6

Mortgage payment protection cover

Answer 6

Designed to cover mortgage if payer gets unwell etc.

Question 7

Accident and sickness cover

Answer 7

Taken out for annual periods and can provide for income or lump sum payments in the event of an accident.

The amount of cover may be the lower of a set amount it maximum percentage of the individuals salary.

Waiting period between when an individual becomes unable to work and when benefits start may be 30 or 60 days

Question 8

Household cover

Answer 8

House and contents insurance.

Question 9

Medical insurance

Answer 9

Intended to cover cost of medical and hospital expenses.

• costs that will be covered are usually closely defined
• limits on what will be paid

Question 10

Long term care

Answer 10

Provide the funds that will be needed in later life to meet the cost of care. Benefit will paid as an income.

Question 11

Business insurance

Answer 11

Types are Liability insurance and indemnity insurance.

Question 12

Investment and saving

Answer 12

Saving is Putting money aside without risk and the chance to earn interest.

Investing involves committing money into an investment vehicle in the hope of making a financial gain. Involves greater risk.

Question 13

Later life planning

Answer 13

Pensions etc. saving for retirement.

Question 14

Estate planning

Answer 14

Making sure that a client takes appropriate steps to ensure that their accumulated wealth passes to their intended beneficiaries.

First step is to assess the extent of a clients assets and liabilities.

A balance sheet is created to direct the client to consider 3 key areas:
1. Whether they need to execute a power of attorney (POA) to protect their i interests when they are incapable
2. Whom they wish to inherit their estate
3. The extent of any liability to inheritance tax that may arise

If a person doesn’t leave a will then the legal system determines who inherits.

Question 15

Tax planning

Answer 15

Tax avoidance - the legal exploitation of the tax system to one’s own advantage, to reduce the amount of tax that is payable by means that are within the las, while making a full disclosure of the material information to the tax authorities

Tax evasion - general term for efforts by individuals, companies, trusts and other entities to evade the payments of taxes by illegal means

Tax mitigation - acceptable tax planning. Minimises tax liabilities in ways that are expressly endorsed by tax legislation.

Question 16

Offshore considerations

Answer 16

Most countries tax systems can be loosely categorised as either a worldwide or territorial based system.

Worldwide - residents of that country are taxed on their worldwide income and capital gains irrespective of where the income or gains arise.

Territorial - residents are taxed on income and capital gains arising in that country and income and gains arising outside of that country are not liable to tax

Question 17

Legal persons and capacity

Answer 17

A legal person is an individual or an entity that is recognised as having legal rights and obligations ugh as having the ability to enter into contracts of some of the main legal concepts.

Question 18

Individuals

Answer 18

A person who is of age and of sound mind has the legal capacity to make their own choices and decisions, so they can enter into contracts providing that is not illegal or void for reasons of public policy.

Question 19

Attorneys and deputies

Answer 19

A person who has legal capacity can authorise someone else to act for them by executing a power of attorney which is a legal document that authorised someone to act on their behalf.

1. Ordinary power of attorney (OPA):
   Authorised one of more persons to make financial decisions on an individual’s behalf or to undertake specific actions.
2. Lasting power of attorney (LPA):
   If person becomes unable to act on their own behalf. Two types of LPA, one for financial decisions and one for health and care decisions.
3. Deputy Order:
   If someone hasn’t made an LPA and is incapable a deputy needs to be appointed. Requires an application to the court of protection to appoint a deputy.

Question 20

Personal representatives

Answer 20

When someone dies someone needs to collect in their assets.

Need to show they are responsible for doing so by applying for a grant of representation.

The grant of probate is a legal document that bears the seal of the court and formally confirms the appointment of the executor (person who is left to deal with affairs of deceased person). If no executor then someone becomes administrator.

Question 21

Trusts

Answer 21

A legal means by which one person gives property to another person to look after on behalf of yet another individual.

The terms of a trust are set out in a trust deed, which will also appoint the trustees and give them powers to manage the trust and invest assets.

Question 22

Companies

Answer 22

A company is a legal entity formed to conduct business or other activities in the name of its members. It is a legal person in its own right.

Question 23

Partnerships

Answer 23

Exists when two or more persons commence in business together with a view to making a profit.

Needs to be a partnership agreement that takes the form of a deed setting out the way in which the partnership will operate.

3 types of partnership:
1. Conventional - partners responsible for their own and each others debts
2. Limited - at least one partner must have unlimited liability
3. Limited liability

Question 24

Ownership of property

Answer 24

Two types of property - real and personal property.

Personal property includes possessions of any kind. Key difference between personal and real is that real property is fixed permanently to one location.

Question 25

Joint ownership

Answer 25

When assets are held in joint names, the surviving joint owner takes the deceaseds share automatically. The surviving joint owner needs to register the death certificate with the bank or other financial institution; this should then transfer the asset into the sole name of the survivor.

Alternative type of joint ownership known as tenancy in common. This is where an asset is owned by one or more individuals who could own the asset in equal shares or potentially in unequal shares.

Question 26

Insolvency and bankruptcy

Answer 26

Insolvency is where the liabilities of a business or individual exceeds their assets or where they are unable to repay their debts as they fall due. Insolvency is a term that is used to describe all types of financial failure.

An individual can be declared bankrupt if they owe more than £5000 to any creditor.

With companies the two main processes encountered as liquidation and administration:

Liquidation is the legal ending of a limited company. A business will be ‘struck off’.

Administration is where someone will be appointed to take control of a company.

Question 27

Financial advice process

Answer 27

Five distinct stages:

1. Determine clients requirements
2. Formulate strategy to meet clients objective
3. Implement the strategy by selecting suitable products
4. Revisit the recommended investments to ensure that they continue to meet the clients needs
5. Periodically revisit the clients objectives and revise the strategy

Question 28

Client relationships and communication skills

Answer 28

• helping clients on
• documenting the clients objectives
• agreeing and help appropriate strategy
• acting in best interests

LISTEN TO THEM

Question 29

Matching solutions with needs

Answer 29

Must know the customer:
- personal details
- financial details
- objectives
- risk tolerance
- liquidity and time horizons
- tax status
- investment preferences

Question 30

Attitude to risk

Answer 30

Always know clients risk profile.

1. Risk tolerance - a personality characteristic best described as a clients willingness to accept a certain level of fluctuation in the value of their investments
2. Attitude to risk - represents the Clients personal opinion on the risks associated with making an investment, based on their prior knowledge and experience
3. Capacity for loss - clients ability to absorb any financial losses that might arise from making a particular investment.

Question 31

Objective factors in risk profiling

Answer 31

1. Timescale - over which a client may be able to invest will determine both what products are suitable and what risk should be adopted
2. Commitments
3. Wealth
4. Life cycle
5. Age

Question 32

Subjective factors in risk profiling

Answer 32

1. Clients level of financial knowledge
2. Clients comfort with risk
3. Clients preferred investment choice
4. Clients approach to bad decisions

Question 33

Suitability and affordability

Answer 33

Make sure it’s suitable and that client can afford.

Question 34

Information given to clients

Answer 34

Ensure client has all information needed to ensure that they are in a position to make a full and informed decision.

Question 35

Consumer rights

Answer 35

‘Cooling off period’ - period of reflection.