Chapter 3: The Market And The Platform Service Provider Flashcards
‘Guided sales process’
A platforms internet site enables the investor to filter the available asset range according to their view on risk and exposure.
Robo-advisor
Reflects a risk rating performed electronically within a portal which then leads to a portfolio being suggested to the client.
What does Platform business model do?
This enables the investor( and their adviser) to view their entire portfolio on a single screen; place bit and sell orders via the platform’s technology, and see details of executed transactions, income payments and corporate actions.
More about platform business model?
Aggregates investor-level transactions, resulting in a smaller number of market trades each being of higher value, producing greater operational efficiency.
Benefits to investor of Platform model
- A wide range of assets are available
- Centralised paperwork (single statement gives info on all assets and wrappers on request)
- A single ISA or pension plan within the platform can hold funds from various providers
- increased flexibility to switch assets
Benefits to the product provider of the platform model
- administration costs can be reduced significantly as only one account is maintained by the register, in the name of the platforms nominee company
What four components may a platform consider having:
- web portal
- a transaction processing and settlement service
- a custody service
- ancillary and value added services
What can the web portal do ?
Enables users to see current state of.
-Holdings
-Instruct Activity
-Access other services
What might a platform investor wish to review on a web portal?
- One or more wrappers individually
- The combined picture of the wrappers
- all family holding in particular funds or assets specialising in a particular sector
- How the portfolio(s) have performed in comparison to benchmark
What is a ‘switch’?
An asset sale together with a corresponding asset purchase to reinvest those proceeds
What does a custody service do?
Any assets taken into the platforms care are held securely for the investor - whether as investments or cash
What does a custody service ensure for exchanges of money for investments ?
That they take place correctly while also ensuring that clients assets are separate from any assets of the platform itself
What do Ancillary services include?
Value added services such as:
-CGT calculators
-Portfolio modelling
-Risk management tools
-Administrative tools
An example of administrative tools in Ancillary services
Ability to access fund literature and other investor information documents
Data entered when transferring a new client’s existing portfolio onto the platform.
• Identification of the asset (name/ID)
• Quantity held
• Original cost of the asset
• Who is currently holding the asset in custody
• The product/wrapper in which the asset is held
• Current value of the asset
What happens once data is entered on the platform?
Update dashboard with details of the holding
Are advisors paid commission by AFM?
No
How are advisors instead paid by AFM?
They charge investors a fee for their services, which may include supply of the platform service.
What activities are subject to a specific charge?
• Asset buys/sells
• Electing to vote at the company meeting of an asset held in the portfolio
• Property investments within SIPPs wrappers
What rules has the FCA created for platform operators, fund managers and product providers?
Consider financial value of their offering to retail investors.
As part of Consumer duty financial firms must ensure
• Any customers receiving a similar service should pay a similar charge
• The charge should be proportionate to the firms services for the customer
What Determines a clients investment strategy
• Growth or income
• Timescale
• Attitude to risk
• Investment knowledge
• Existing investments and debts
What two distinct types of test that firms must perform on clients did the MIFID introduce?
In cases of transactions
• Suitability assessment
• Appropriateness test
What is the point of a suitability assessment?
To collect information on the clients level of knowledge and experience, risk tolerance in order to make a personal recommendation.
Benefits of the platform model to investors.
• Wide range of assets available
• Single statement with all holdings
• Increased flexibility to switch assets within an ISA
Benefits of the platform model to advisers
• Simplified administration
• Increased time spent on advising clients not admin
• Reduced time spent building a portfolio from various providers
• Simplified switching reduces time client out of the market
Benefits to the product provider of a platform model
• Reduces admin costs
Which fund switching method exposes the client to market risk?
Sequential
Market risk is where the market price of an asset declines.
Key factors to consider that are common to each investor but will vary by investor are:
• Time Horizon
• Return Requirement
• Risk tolerance
Best definition of a platform
One stop shop for investors to purchase many different funds
Best definition of a platform
One stop shop for investors to purchase many different funds
Which party is least likely to sign a Service level agreement (SLA)?
The Platform Client
Regulatory changes that impact clients?
Post RDR
Clients now pay a platform service charge- previously the product provider rebated part of the annual management charge back to platform operator
What are the Clients investment objectives? 6
- Capital growth and income
- Timescale
- Attitude to risk
- Investment knowledge
- Existing Investments and debt
- Liquidity needs
What are Model portfolios ?
Are pre selected portfolios where investors have similar targets objectives,and, attitude to risk.
Risk profiles and investment objectives
“Cautious” for income
Cautious: willing to accept lower income for lower risk. Exposure to high yield bonds and equity will be low.
No derivatives or exposure to derivative funds.
Risk profiles and investment objectives
“Moderate” for income
Balance potential risk with potential income. Exposure to high yields bonds and equities will be higher. Use of funds that use some yield enhancement strategies.
Risk profiles and investment objectives
“Adventurous” for income
More aggressive strategies to gain higher income. Substantial exposure to high yield bonds and equity. Use funds that employ higher-risk and income-generating derivative strategies.
Risk profiles and investment objectives
“Cautious” for Risk tolerance
Seeking maximum growth with modest risk. Equity based CIS from a significant part of portfolio. No exposure to funds that use derivatives.
Risk profiles and investment objectives
“Moderate” for Risk tolerance
Balance risk with potential growth.
Equities form the principal part of portfolio.
Some exchange-traded finds and indirect exposure to derivatives.
Risk profiles and investment objectives
“Adventurous” for Risk tolerance
Adopt more long-term view to pursue a more aggressive strategy.
Equities may form the whole of the portfolio.
Possibly use some contracts for differences.
Suitability: All customers
This rule requires firms to obtain sufficient information to give suitable advice to retail clients (all businesses) and professional clients (MIFID businesses)
Portfolio rebalancing is?
Realigning the weights of a portfolio by periodically buying or selling certain assets.
Why does portfolio rebalancing occur?
Investors circumstances have changed or
Weightings have moved over time as market prices change
What is the sequential method?
Buy order placed when the sell deal is confirmed
What is the simultaneous method?
Buy and sell orders placed at the same time
What is indemnity insurance ?
Protects against claims of negligence
What is a platforms relationship with an adviser?
• They include independent advisers and restricted advisers
• Platforms provide tools to enable advisors to manage client accounts
• May appoint a discretionary IM where appropriate
Contracts platforms have with technology providers?
Two basic contracts
- Development of new software
- Availability of service
Metrics used to judge the service are called??
Key performance indicators
What requirements under client agreements are fulfilled?
• AML
• Client asset rules
• Conduct of business rules
Alternative name for internal rate of return
Money weighted rate of return
Portfolio planning tools:
- What if scenario analysis
- Analysis of the portfolio
- Investment opportunities reports
- Benchmark comparison
Portfolio planning tools:
• What if scenario
• analysis of the portfolio by wrapper type (SIPP, ISA etc)
• Investment opportunity reports
• Benchmark comparison to an index
Financial assets that fall outside the appropriateness test:
• company shares trading on a regulated market- provided such shares do not include an embedded derivative
• bonds and other forms of securitised debt trading on a regulated market
• money market instruments
• shares in an undertakings for the collective investment in transferable securities scheme
• structured deposits
The following list which summarises the non- complex financial instrument:
• it does not give a right to acquire or sell another asset
• it is not a derivative
• there are frequent opportunities to dispose of the asset at publicly a available market prices
• the asset does not create a potential liability that does not exceed the costs of purchase
• asset does not include explicit or implicit exit charges
• info on asset is publicly available
What is the following describing:
Avoid the expense of creating individual portfolios for each of them, and also to advert where two clients with both the same objectives and same risk appetite have portfolio that’s produce widely different returns.
Model portfolio
What may the platform operator be able to do in regards to a model portfolio?
Negotiate the respective AFMS to offer units/shares at a reduced rate of the annual management charge.
What does selected model portfolios reduce the risk of?
Adviser making incorrect calculations when deciding on transactions for an individual account.
What types of risk and what is this risk associated with model portfolios?
Corresponding risks. The platform must ensure that its model portfolio functionality is calculating the correct transactions as otherwise it risks being liable for investment losses of the investors portfolio allocation becomes incorrect.
For model portfolios the risks for the adviser/manager centre upon:
• whether the pre loaded model portfolio has been correctly risk assessed
• ensuring that the correct model portfolio has been assigned to each account.
Examples of the investment opportunity reports which is part of portfolio planning tools.
• a list of clients who have not yet used their ISA allowance this year
• a list of all clients who might have a liability to capital gains tax this year
What is benchmark comparisons?
Part of the portfolio planning tools which show how the portfolios performance compares to indices.
What are the two methods of taking further investments and withdrawals into account?
• money weighted rate of return
• time weighted rate of return
What is money weighted rate of return?
One method of measuring the internal rate of return of an asset to which performance of the asset rather then transaction is undertaken.
Time weighted rate of return is?
Established by breaking the investment period into a series of sub periods.
What risks does STP reduce ?
It’s an important part of minimising the risk of performing incorrect or inaccurate deals.
What is a disadvantage of portfolio rebalancing?
Each transaction has the potential to affect the investors CGT position unless the assets are held within a wrapper exempt from CGT.
What is something that an adviser should be mindful of prior to undertaking portfolio rebalancing?
Tax implications
Advantage of simultaneous switching?
The investor remains exposed to market price movements.
Disadvantage of simultaneous switching
The need for the platform operator to manage the cash flow implications of either failed trade settlement or differing settlement periods.
What risk does sequential switching minimise?
Risk that the ‘buy’ deal will require settlement ahead of any corresponding “sell” proceeds being received.
The key decision for a sequential method is defining the point in time at which ?
The ‘buy’ trade can be instructed.
What is a service level agreement (SLA)?
Part of a service contract in which the parties define the level of service that must be provided for activities to operate correctly.
What does “level of service” refer to in this context?
Both the quality of each activity and the time deadlines for performing it.
The SLA itself must be sufficient detail and scope in relation to the nature and scale of service being offered and will include the following elements:
• introduction (confirming the parties)
service provider’s duties and responsibilities
• customer’s duties and responsibilities
• performance standards
• key performance indicator (KPI) reporting (content, frequency)
• dispute resolution (procedures, escalation)
• remuneration
• data protection and security obligations
• intellectual property rights
• termination clauses
• signatures.
These metrics or KPIs may be categorised into such areas such as:
• supportability
• flexibility
• recoverability
• durability
• performance
• reliability
• scalability
KPIS might be presented in a dashboard for what reason?
Give a health evaluation of the service.
Examples of measured values for a technology service that might be included in a dashboard include:
• availability of the application over a length of time.
• transaction speed
• response times
• functional errors reported by the system
• the average number of users or transactions
Where an adviser is selecting a platform to use with/for its clients, they consider what?
• wrapper choice
• asset range
• cost
The adviser will consider the total costs of investing, which includes three elements:
- Cost of advice services
- Cost of platform services
- Cost build into the assets
The three cost elements may be combined to determine what?
Reduction in yield
What is reduction in yield?
Reduction in yield reflects the amount of investment growth lost due to the effect of charges.
When performing due diligence on a platform what two points should be considered?
About your business
About the platform
About your business: due diligence 4 points
• your overall business model and the types of services you want to offer
• your typical target market and approach to market segmentation
• your renumeration model
• your existing systems and procedures
The total cost of investing includes three elements:
• cost of advice services
• cost of platform services (may be bundled)
• costs built into the assets (initial charge and AMC of a collective fund which may differ between the classes available on differing platforms).
When an alert in a dashboard is highlighted, this means what?
Measured performance has dipped below the set standard
platform providers operate control processes to prevent what risk?
Overdrawn accounts
For the money weighted rate of return, if the rate of return is an unknown variable, what will occur?
It is necessary to use trial and error to determine the value of ‘r’ to satisfy the equation.
What is the purpose of professional indemnity assurance?
Protects against legal claims based on negligence.
Where an investor pays a ‘click charge’ to a platform, this will relate to:
operational tasks for which an investor pays a discrete fee to the platform
Where a platform provider uses sequential fund switching, what key factor dictates the extent to which investors are exposed to market
price movements?
The point at which the purchase is made
What is (MWRR) used to measure?
The performance of a fund that has had deposits and withdrawals during the period being measured.
What is a drawback on MWRR?
It cannot be solved algebraically.
An alternative to the disadvantage of MWRR?
An alternative, less mathematically complex, method is time weighted rate of return (TWRR).
Normally the dashboard lists each asset that an investor owns in each wrapper showing the ..
• the number of shares/units held
• original cost
• current market price and value
What is an example of an Ancillary service that only benefits the adviser?
Platform may provide access to regulatory forms that the adviser may use when running their business
Where an adviser will introduce a client to the platform and the platform will invoice the investor directly. What is this called?
Unbundled
A bundled charging is applied to?
Platform operator may invoice the adviser for the supply of the service in which case the platform fee is said to be bundled with the advisers fee
Activity based charges are usually set as what?
Fixed cash amounts but it may rarely also be variable
For variable charges, what impacts does this have on an investor?
The platform collects higher amounts of charges as the investors account value increases.
With shorter timescales, what must be considered?
Liquidity and volatility of the underlying assets
Under what COBS is the appropriateness test?
COBS 10A
When does a firm not need to issue a suitability report?
• when a firm acts as an investment manager and makes recommendation relating to regulated CIS
• client is not a resident in the UK and was not in the UK when the advice was given
• recommendation to increase premium in an existing contract
In regards to the web portal, a financial adviser might need to see the combined picture of all its customers who:
• have similar investment objectives
• have portfolios in similar size
• are invested in for example a particular fund, product provider, geographical or industry sector.
For TMWRR, when is a sub period created?
Whenever there is movement of capital into or out of the fund
Why may a transaction not yet be executed?
• suitability or appropriateness checks have not been completed
• payment of cash received from customer has not yet been cleared
• AML has not been done
Discretionary fund manager may either create what portfolios? For who
High net worth individuals. Model portfolio or bespoke portfolio .
What is a consequence of falling below service level agreement standards?
Penalties paid by either party
About the platform (due diligence)
• platform provider
• terms & conditions
• charges
• range of funds and asset classes
• functionality
• accessibility
• support tools
How can use of a platform comparison service be cost effective in achieving due diligence?
These services are sometimes available free of charge to advisers and platforms themselves bear the cost and supply the data for this comparison.
The formal client agreement - the legal contract often described as terms and conditions sets out what?
The contractual obligation on each party to provide information or execute certain tasks within certain time periods so clients instructions can be correctly carried out.
Terms & conditions will also enable the firm to document various factors such as?
• how will clients assets be held
• how will clients be categorised and what consents the client might give to the firm in respect of undertaking business
• whether the firm has unilateral power to amend the agreement
• treatment of interest earned on client money balances should also be stated.
