Chapter 5 - Client Advice Flashcards
What is the difference between a nominal and real liability?
Nominal liability - one that has a fixed monetary value e.g. a bank loan.
Real liability - one that changes in monetary terms due to inflation e.g. a standard of living
What is the difference between ‘hard facts’ and ‘soft facts’ about a client?
Hard facts - include personal and financial information.
Soft facts - any additional subjective information that may be relevant e.g. client requirements/aspirations or risk tolerance.
What is defined as Capital Risk?
The potential variability in the principal (capital) value of an investment.
What is defined as Inflation Risk?
The potential variability in inflation rates.
What is defined as interest rate risk?
The risk of changes in the bank base rate and its knock-on effect.
What is defined as Shortfall Risk?
The risk of the return on an investment falling short of the amount needed for a client to achieve their objectives.
What are the three components of a client’s risk profile?
Required risk - that is needed to achieve their objectives.
Risk capacity - level of risk a client can afford to take.
Risk tolerance - level of risk a client is comfortable with.
What are the two types of a pension fund?
Defined Benefit (DB): Achieving a specific return based on the employee's salary and years worked. Defined Contribution (DC): Achieving a general increase in the value of contributions paid on behalf of the employee.
What is a Term Assurance Policy?
Where an individual’s life is insured for a specific period of time.
What is a Whole Life Policy?
Where a capital sum will be paid upon the death of the policyholder.
What is an Endowment Policy?
Combines an individual’s life insurance and savings e.g. with mortgages, the life insurance may be used to pay off the mortgage upon death.
What are the six stages of the financial planning process?
- Client’s financial objectives
- Fact-finding
- Processing facts/data
- Formulate plan
- Implement plan
- Review plan
What term describes the risk that index tracking funds will not follow the index?
Tracking error
Which asset class is likely to have the lowest level of capital risk?
Cash deposits. Cash deposits are generally not exposed to capital risk (the risk of loss of value of the amount invested.
What is the Loan-to-Value Ratio?
An assessment of lending risk that financial institutions use before approving mortgages.
LTV = Mortgage Amount / Appraised Property Value
