Chapter 5 - Client Advice Flashcards
What are the two main types of investors?
Retail and institutional investors
What is the FCA’s TCF initiative?
Treating Customers Fairly
TCF (Treating Customers Fairly) aims for 6 outcomes, what are they?
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
What are the main 3 factors affecting an investor’s (client’s) needs/objectives?
a) TIME horizon
b) RETURN requirement
c) RISK TOLERANCE
What are the 4 other factors affecting investors (the client’s) needs?
clue: you’ll need to find these out
a) LIQUIDITY
b) TAX
c) REGULATORY requirements
d) ETHICS (e.g. religion)
What are the steps in the financial planning process (investor planning for client) ?
1) understanding the client’s OBJECTIVES
2) QUANTIFY those objectives: show what is required and when
3) amend objectives in line with AFFORDABILITY
What steps should be taken to understand a client’s current circumstances?
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
What is Capital Risk?
risk of losing part or whole of investment when investing in stocks, non-government bonds, real estate, commodities, and other alternative assets.
What is Inflation Risk?
Risk that inflation will undermine an investment’s ‘purchasing power’: bonds and cash are at a particular risk
What is interest-rate risk?
When the interest rate lifts above the interest rate that you had secured in a bond. Your bond is then worth less
What is Shortfall Risk (also known as Conditional Value at Risk)?
The risk of falling short of an expected target? Will affect long-term returns
How and why do investment advisors minimise risk?
Spread risk between different asset classes - they have different exposures to different risks?
Which 4 factors affect a client’s risk profile?
a) TIMESCALE of investment
b) WEALTH - the amount of risk capital there is
c) investment EXPERIENCE
d) their PSYCHOLOGY
What is the main driver of performance?
asset allocation
What should be considered before selecting a fund?
Past performance, charges, and financial strength of provider
How should performance be measured?
Can be absolute return, it is more meaningful when it is benchmarked against the performance of similar investments or funds
What facts should an investment adviser get on their ‘fact finding mission’?
Expenditure, objectives, expected income levels, current financial status, entitlement of benefits, risk profile, whether they have emergency funds
What is also considered good practice when assessing clients?
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
There are two types of pension fund? What are they? And, what is the difference?
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
How are pensions taxed?
How are life assurances and general insurances taxed?
They are not!
Insurance policies are!
Pension funds and what other investment vehicle have long term liabilities?
Life assurance companies
How do general insurance companies differ?
They have much shorter-term liabilities. They focus on shorter term assets. Favouring higher liquidity
Rank institutional funds in the UK by their size?
1) Pension funds
2) insurance funds
3) Unit trusts
4) other investment companies
For how long can you carry forward a loss (in share value)?
Indefinitely
What is the CGT exempt amount per person?
£12,000
What is churning?
When a firm or broker frequently trades stocks to boost their own commission
A retail client can cancel the purchase of a collective investment scheme within how many days?
14 days
Lasting Power of Attorney must be registered with which office?
the Office of Public Guardian
What is a tenancy in common?
own a property jointly but have control over your share - can sell, or leave to someone else
What is a Bare Trust?
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.
