Chapter 5 - Client Advice

Question 1

What are the two main types of investors?

Answer 1

Retail and institutional investors

Question 2

What is the FCA’s TCF initiative?

Answer 2

Treating Customers Fairly

Question 3

TCF (Treating Customers Fairly) aims for 6 outcomes, what are they?

Answer 3

i) Consumers confident that firms treatment of them is central part of their corporate CULTURE
ii) Products marketed and sold in retail market must meet needs of identified GROUPS and TARGETED accordingly
iii) Provided with clear INFORMATION and kept appropriately INFORMED after sale
iv) Advice must take account of client’s CIRCUMSTANCES
v) Products provided PERFORM as the firm EXPECTED them too
vi) Consumers don’t face unreasonable POST-SALES BARRIERS imposed by firms to prevent them switching products or provider, or make a complaint

Question 4

What are the main 3 factors affecting an investor’s (client’s) needs/objectives?

Answer 4

a) TIME horizon
b) RETURN requirement
c) RISK TOLERANCE

Question 5

What are the 4 other factors affecting investors (the client’s) needs?
clue: you’ll need to find these out

Answer 5

a) LIQUIDITY
b) TAX
c) REGULATORY requirements
d) ETHICS (e.g. religion)

Question 6

What are the steps in the financial planning process (investor planning for client) ?

Answer 6

1) understanding the client’s OBJECTIVES
2) QUANTIFY those objectives: show what is required and when
3) amend objectives in line with AFFORDABILITY

Question 7

What steps should be taken to understand a client’s current circumstances?

Answer 7

i) collect DATA regarding their current circumstances
ii) FACT-FIND. Het hard facts (factual information) and soft facts (opinions and preferences)
iii) clarify facts and details with 3rd parties through a LETTER OF AUTHORITY

Question 8

What is Capital Risk?

Answer 8

risk of losing part or whole of investment when investing in stocks, non-government bonds, real estate, commodities, and other alternative assets.

Question 9

What is Inflation Risk?

Answer 9

Risk that inflation will undermine an investment’s ‘purchasing power’: bonds and cash are at a particular risk

Question 10

What is interest-rate risk?

Answer 10

When the interest rate lifts above the interest rate that you had secured in a bond. Your bond is then worth less

Question 11

What is Shortfall Risk (also known as Conditional Value at Risk)?

Answer 11

The risk of falling short of an expected target? Will affect long-term returns

Question 12

How and why do investment advisors minimise risk?

Answer 12

Spread risk between different asset classes - they have different exposures to different risks?

Question 13

Which 4 factors affect a client’s risk profile?

Answer 13

a) TIMESCALE of investment
b) WEALTH - the amount of risk capital there is
c) investment EXPERIENCE
d) their PSYCHOLOGY

Question 14

What is the main driver of performance?

Answer 14

asset allocation

Question 15

What should be considered before selecting a fund?

Answer 15

Past performance, charges, and financial strength of provider

Question 16

How should performance be measured?

Answer 16

Can be absolute return, it is more meaningful when it is benchmarked against the performance of similar investments or funds

Question 17

What facts should an investment adviser get on their ‘fact finding mission’?

Answer 17

Expenditure, objectives, expected income levels, current financial status, entitlement of benefits, risk profile, whether they have emergency funds

Question 18

What is also considered good practice when assessing clients?

Answer 18

Their understanding of risk, as well as the circumstances in which this risk might come to fruition
Ensure that the advice provided remains suitable if there is a change in circumstances

Question 19

There are two types of pension fund? What are they? And, what is the difference?

Answer 19

Defined Benefit (DB): Retirement benefit calculated based on years of services and their salary history 
Defined Contribution (DC): (401k) The employer puts money aside on behalf of their employees - it is invested - this money can change from investment fund if the person changes job

Question 20

How are pensions taxed?

How are life assurances and general insurances taxed?

Answer 20

They are not!

Insurance policies are!

Question 21

Pension funds and what other investment vehicle have long term liabilities?

Answer 21

Life assurance companies

Question 22

How do general insurance companies differ?

Answer 22

They have much shorter-term liabilities. They focus on shorter term assets. Favouring higher liquidity

Question 23

Rank institutional funds in the UK by their size?

Answer 23

1) Pension funds
2) insurance funds
3) Unit trusts
4) other investment companies

Question 24

For how long can you carry forward a loss (in share value)?

Answer 24

Indefinitely

Question 25

What is the CGT exempt amount per person?

Answer 25

£12,000

Question 26

What is churning?

Answer 26

When a firm or broker frequently trades stocks to boost their own commission

Question 27

A retail client can cancel the purchase of a collective investment scheme within how many days?

Answer 27

14 days

Question 28

Lasting Power of Attorney must be registered with which office?

Answer 28

the Office of Public Guardian

Question 29

What is a tenancy in common?

Answer 29

own a property jointly but have control over your share - can sell, or leave to someone else

Question 30

What is a Bare Trust?

Answer 30

Bare trusts Assets in a bare trust are held in the name of a trustee. … This means the assets set aside by the settlor will always go directly to the intended beneficiary. Bare trusts are often used to pass assets to young people - the trustees look after them until the beneficiary is old enough.