Chapter 2 Flashcards
What is the most appropriate method for client communication when reporting on a clients portfolio?
The most appropriate method for client communication is for information to be made available to clients on a current, probably real-time basis, via the internet. Many portfolio managers will provide clients with a monitoring facility enabling them to inspect their portfolio performance, at least in summary form, via web based portals.
What is ‘Front Running’?
The practice of front running or pre-positioning (ie, dealing ahead of customer orders) has long been considered wrong since it takes advantage of knowledge of the order and its likely impact on the trading price. Thus, it may amount to insider dealing, and is prohibited under the Code of Market Conduct
What are the 3 main ways in which portfolio performance is assessed?
Comparison with a relevant bond or stock market index
Comparison to similar funds or a relevant universe comparison
Comparison to a customer benchmark
What is ‘Market/ Systematic’ risk?
Market/ Systematic is the risk that the overall market in general, or the relevant part of the capital markets for investors wanting exposure to specific sectors, will rise or fall, as economic conditions and other market factors change.
What is ‘Interest Rate’ risk?
Interest rate risk is where changes in interest rates will affect prices; this is possibly a subcategory or market risk
What is ‘Exchange Rate’ risk?
Any investor who purchases securities denominated in a foreign currency may suffer (or benefit) from changes in exchange rates between the home curreny and the other currency
What is ‘Default’ risk?
Default risk is where an investor may find that a company from which they have purchased a security from could become insolvent due to a harsh operating environment, high levels of borrowing, poor investment decisions or other financial miscalculation
What is ‘Liquidity’ risk?
The assumption made is that large capital markets provide liquidity to investors to sell a security easily with a narrow spread between the ask and bid prices. During stressful periods this liquidity can diminish, and it can become much harder to sell a security readily
What is ‘Alpha’?
Alpha refers to the active or excess return that an investment/ portfolio yields which is greater than an index or benchmark representing broader market trends
What is ‘Beta’?
Beta refers to the measurement of volatility/ systematic risk of a portfolio compares to the broader market
What is ‘High-Frequency Trading’?
HFT is the use of technologically advanced tools and algorithms to trade financial instruments
What are the key differences between HFT and traditional trading?
Key differences are:
- HFT trading takes places solely through computer algorithms; and
- orders are processed by HFT firms and positions are opened and closed within seconds and fractions of seconds
What is the ‘Algo Wheel’?
An ‘Algo Wheel’ refers to software that is programmed to select the best execution option automatically and can react for faster than a human can in switching decisions
What information is necessary that a firm must obtain when making a personal recommendation?
When a firm makes a personal recommendation, provides investment advice or is managing a client’s investments, in order to ensure its recommendations or decisions are suitable for the client, it should obtain the necessary information regarding the client’s:
Knowledge and experience in the investment field relevant to the specific type of designated investment business being offered to the client
Financial situation, including the client’s ability to bear losses, and
Investment objectives and the present risk profile of the clients.
When must a suitability report be provided?
a suitability report must be provided:
in connection with a life policy, before the contract is concluded – unless the necessary information is provided orally, or cover is required immediately (in which case the report must be provided in a durable medium immediately after the contract is concluded), or
in connection with a personal pension scheme or a stakeholder pension, if the cancellation rules apply, within 14 days of concluding the contract, or
in any other case, before the transaction is concluded unless the agreement is concluded using a distant marketing communication and if the client consents as soon as possible after the transaction is affected or executed.
What is the basic information required to know about a clients circumstances?
The basic information about a client’s circumstances that need to be captured can be broken down into the following:
personal and financial details
liquidity and time horizons
tax status, and
investment preferences.
What is ‘Churning’?
Churning is the activity of over-dealing and/or trading more frequently for a client in order to generate additional fees and/or commissions for the firm. It is relevant where, for example, a firm manages a client’s portfolio on a discretionary basis.
What is ‘Switching’?
In contrast, ‘switching’ is the activity of selling one investment and replacing it with another.
What is ‘Time Horizon’
Time horizon refers to the period over which a client can consider investing their funds. Definitions of time horizons vary, but short term is usually considered to be from one to four years, while medium term refers to a period from five to ten years and long term is considered to be for a period of ten years or more. Time horizon is very relevant when selecting the types of investment that may be suitable for a client.
What is a MTF
An MTF is a system that brings together multiple parties (eg, retail investors or other investment firms) that are interested in buying and selling financial instruments and enables them to do so
How do liquidity and time horizons overlap?
It is also essential to understand a client’s liquidity requirements and the time horizons over which they can invest, as these will also clearly impact the selection and construction of any investments.
