Chapter 2 - Financial Planning Flashcards
What is financial planning?
How do the CISI define it?
Financial Planning is a service to assist in organising financial affairs to achieve financial and lifestyle goals
What are the 6 stages of financial planning?
1) Establishing a client relationship
2) Collecting Client Information
3) Analyse financial status
4) Develop Solutions
5) Implement
6) Review
The first stage of financial planning is establishing a relationship, what does research suggest is the most important thing here?
Trust
What 3 areas is trust built upon
in terms of a financial planning relationship
1) Knowledge / Competence
2) Ethics & Character
3) Empathy / Maturity
What comprises trust in competence?
1) Technical understanding
2) Ability to explain without jargon
What comprises ethics & character?
1) Reputation of the firm and individual
What comprises maturity and empathy?
1) Ability to deal with difficult situations & make decisions
What must an advisor classify during the establishing of a relationship?
Client Categorisation
If a retail client wants to become professional, what 3 things must be written?
1) Client expresses desire
2) Firm explain loss of protection
3) Client accepts loss of protection
What are the 6 consequences of going retail to professional client
1) Communication (more detailed & complex)
2) Suitability (assumption of acceptance of risks)
3) Dealing (Trading off market)
4) Funds (unregulated schemes / funds allowed)
5) Reporting (leverage reports not needed)
6) Client assets (less stringent requirements)
What is the difference between independent and restricted advice?
Independent advice has access to the entire market to recommend a product
Restricted advice can only offer from a range of suppliers
Give 3 examples of restricted advice
1) Only one provider
2) Small range of providers
3) Cannot advise on existing products in place
What is the difference between souce of wealth & source of funds?
Wealth = how total wealth was acquired (e.g. salary, inheritance)
Funds = how specific funds for transaction are acquired (e.g. salary, sale, gift)
What pieces of client data must be collected?
8 thing total
1) Personal Details
2) Health
3) Family / Dependants
4) Earnings
5) Expenditure
6) Assets / Liabilities
7) Pensions
8) Inheritance windfall / Estate planning
Why must personal details be collected, and what ones?
1) Contact Details
2) Residency (for domicile and tax)
3) DoB (for lifestyling / timeframes)
What health details must be collected and why?
1) Life expectancty (suitable investments / iht planning)
2) Vulnerability (need to take extra care with these clients)
What info on family & dependants must be taken?
1) Provision for school fees
2) Potential for divorce
3) Partner tolerance to risk
What occupation & earnings info must be taken and why?
1) Suitability of investments (knowledge & experience)
2) Inside info constraints
3) PEP
4) Regularity of income
What expenditure info must be taken and why
1) are they reliant on portfolio for income
2) Are reserve funds enough?
What info on assets and liabilities must be taken?
1) AML purposes
2) Potential tax / cgt
3) Do they have other portfolios to draw on (in emergecy / for liquidity)
What pension arrangement info must be taken?
1) Determine what level of risk outside of pension can be taken
What windfall / estate planning info must be taken?
1) future gifts / inheritnace contribute to shortfalls
2) Can add more growth than if not expecting windall
3) Make provisions for their own will
What is risk tolerance?
The degree of uncertainty an investor can handle
What subjective factors effect risk tolerance?
1) Timescale
2) Family commitments
3) Stafe of life
4) Other assets
What objective factors effect risk tolerance?
1) Psycholgical response to risk
2) knowledge / experience of risk
e.g. those who make losses as they start investing are put off for life
What is risk perception?
How a person judges risk around a certian situation (based on past expereinces)
What is risk capacity?
How much loss / risk an investor can afford to take on
e.g. other assets
cash position
time frame
upcoming liabilities etc
As part of the 2nd stage, investment objectives should be established what are the main 4?
2nd stage is collecting client information
1) Income
2) Growth
3) Income and Growth
4) Outright Growth
What 5 factors should be considered when determining objectives?
1) Tax position
2) Risk Profile
3) Investment preferences
4) Liquidity Requirements
5) Time horizon
Why does risk profile effect what objectives an advisor can suggest?
low risk profile makes growthy objectives unsuitable
why do investment preferences effect what objectives an advisor can suggest?
ESG restrictoins
specific inclusions
islamic inclusoins / exclusions
may limit ability to access income / growth
why do liquidity requirements effect what objectives an advisor can suggest?
need for short term liquidity = unsuitable to have risky assets
long term liquidity = need to make provisions for drawing down
no need for liquiditiy and long time frame = less restrictions
why do time horizons effect what objectives an advisor can suggest?
certain investments have minimum holding periods / suggested holding periods
Shorter time periods may have to hold less risky assets e.g. fixed income
also factor in lifestyling
what are the 3 time horizon periods?
according to the book
Short (0-4)
Medium (5-10)
Long (10+)
Minimum suggested holding period for equity investments?
5+ years
Why does tax status effect what objectives an advisor can suggest?
Tax rates make certain investments more suitable (e.g. capital return vs income)
Also advisor needs to be aware of need to use tax wrappers
also may need to take into account CGT constraints
What is the 3rd stage of the financial planning process?
Analysing Financial Position
What 4 things should be produced at the 3rd stage?
analysing financial position
1) Net Asset Statement
2) Cash Flow Statement
3) Tax Analysis
4) Lifetime Cash Flow Projections
What is a net assets statement?
what is its use?
Breakdown of all assets / liabilities
Can see where holdings are overexposed, concentrated etc.
Can see if any holdings do not align with client risk profile
What is a cash flow statement?
what is its use (in financial planning process)
Breakdown of income vs expenditure
see if income needs to be produced
if there is surplus, could this be invested?
forecast future income / expenditure
What is tax analysis?
what is its use in the financial planning process
assess what investment types are most suitable (e.g. income vs capital growth)
assess the need for VCTs, EISs, SEISs,
See what allowances an individual has or losses than can be brought forward
What is a lifetime cash flow projection?
financial tool used to estimate your future cash inflows and outflows over your entire lifetime. It helps you understand how your finances will evolve
What is the 4th stage in the financial planning process?
Developing solutions
What must an advisor ensure any proposed solutions are?
Suitable
What are the 3 main things that make a solution suitable?
1) Affordable
2) Client understands risk involved
3) Client must understand how solution meets their aims
What assumptions does an advisor have to make?
when suggesting a solution
1) Interest Rates
2) Rates of return
3) Inflation
4) Pension Rates
5) University Costs
6) Future income / expenditure
7) Tax Rates
8) Life expectancy
What situations can lead to unsuitable investments / poor outcomes
1) client does not have knowledge / experience
2) Fail to challenge automatically generated cases
3) Do not consider diversification
When must an advisor seek specialist advice?
1) Pension Transfers
2) Financial Planning
3) Tax Advice
What must be contained in a suitability report?
1) Objectives
2) Assumptions
3) Attitude to risk
4) Assets / Liabilities
5) Income & Expenditure
6) Recommendations
7) Costs / Fees
Overall, what is the purpose of a suitability report?
To explain why the chosen solution and strategy is / remains suitable?
What should an advisor aim for their reports to be?
Clear and understandable
How can an advisor ensure a clear and understandable report?
1) Understandable Language
2) Conciseness (whilst containing important info)
3) Logical Structure
4) Attractive Layout
If a client does not proceed with advice, what must an advisor do?
Find out why they are not proceeding
keep a clear line of communication
What is an insistent client?
What might happen as a result of their insistennce?
A client who recieves advice and acts against it
Ignoring advice can lead to poor outcomes
What are the first two things an advisor should do in regard to an insistent client
not the FCA guidance
1) Clarify what part of advice is being ignored
2) Create two reports -> 1 for original advice & 1 for client’s decision
the 2nd report should include any new guidance as a result of client’s decision
What is the FCA’s 3 step process for dealing with an insistent client?
1) Provide advice, and make it clear why it is suitable (as normal)
2) Explain the risks of the client’s decision to ignore advice (and communicate this to client)
3) Document clearly the client decision and why it is against your advice
What has extra implications in terms of an insistent client decision
If the decision is in regard to a pension transfer
Advisor needs to clearly explain and communicate in more detail the risks
Why do reviews reguarly need to take place?
Financial Planning is cyclical
must check
- client on track to meet objective
- has there been a change in circumstance
- Must keep up to date info on client
How often should reviews take place?
Once every 12 months
Ad-hoc reviews may be necessary where circumstances change
What things should a review cover?
1) Any changes to goals
2) Review and update assumptions
3) Changes to income / expenditure
4) Health
5) Rebalancing
6) Risk
7) Suitability
8) Cost Summary
