Chapter 6 - Discretionary and advisory management

Question 1

occasional reporting

Answer 1

e.g. the issue of contract notes when trades are undertaken

Question 2

periodic reporting

Answer 2

• must be issued every 6 months, except where:
• client requests quarterley
• a levergaed portoflio, must be provided monthly
• capped income drawdown arrangement, AMS annually and DMS every three months

Question 3

top down approach

bottom-up approach

Answer 3

top-down

1. asset allocation - prospects for each main asset class
2. sector selection - prospects for those sectors within their favoured equity markets
3. stock selection - deciding on which stocks or funds should be used. technical and fundemental anaylis aids this decesion

bottom-up

1. focuses on unique attractions of indivudal stocks
2. prospects of the world economy and markets are taken into account, although secondary

styles:

• value - analysis can identify undervalued businesses
• growth at a reasonable price (GAARP) - business with long term sustainable advantages. worth paying a premium for premium chatreteristics
• momentum - capitalsie on existing trends in the market. whether it be inclines or declines

Question 4

bespoke segregated portoflios

managed portfolios

fund portfolios

Answer 4

• bespoke - tailored to an individual client. can be operated on a discretionary or advisory basis
• managed portfolios - structured to a particular risk profile. all clients within a segment recive the same portoflio
• fund portoflios - preferred UTs, OEICSs or multi manager funds (fund of funds)

Question 5

advisory management service

discretionary management service

Answer 5

advisory

clients who do not want to give up decesion making. the client decedies whether or not to accept the advice of an investment manager

• may be more expensive
• portfolio based on advisers model portfolios , may drift
• benchmarking can be difficult

discretionary

client gives discretion to the invetsment manager to manage their portoflio on their behalf. changes are made to the portfolio without the client but within given constraints

• fund switches can be implemented instantlty at the same price

Question 6

fiduciary relationships - private individuals

Answer 6

portfolio structure

• view as single unit - a hollistic view is taken of the clients invetsments across the main portfolios and tax wrappers.
• use of tax wrappers. maximise income or shelter gains
• consideration of annual funding of ISAs and pensios

CGT

• gather CGT history. identify what sales can/should be made. DM under constraints of CGT
• omit CGT. invetsment manager can act freely in accordance to objectives. charges may arise

large holdings with in-built capital gains

• directly held assets for long periods. focused and investment that may not match their risk profile
• consideration of CGT and how to dispose/reinvest the proceeds

Question 7

fiduciary relationships - trust parties

Answer 7

parties to a trust

• settlor - the person who creates the trust. not normally a beneficary but may be a trustee
• trustees - indivudals whom the settlor trusts to look after the money in the best interests of the beneficaries
• beneficiaries - set by the settlor. for an interest in possesion trust:
  
  • life tenant - entitled to recieve the income from the trust during their lifetime or shorter
  • remaindermen - class who take the capital once the interest of the life tenant has ended

Question 8

fiduciary relationships - types of trust

Answer 8

• absolute or bare trust - absolutley entitled to the assets on attaining 18 years of age without condition
• interest in possession trust - one person have the right to income for their life time, on death the capital will pass to other beneficiaries
• discretioanry trust - gives trustees discretion over whom the trust funds pass to. it provides flexibility, although the settlor may set constraints by limiting to a class of beneficiaries

Question 9

blind of trust

Answer 9

• type of absolute trust. settlor remains the benefical owner but have no say in the management of the trust - avoid the appearance of a conflict of interest
• the trustees handover a stament of income and gains at the end of the tax year without identifying any assets. beneficaries are then taxed at their normal rates, so there are no tax benefits

Question 10

fiduciary relationships - powers and duties of trustees

standard investment criteria / advice

Answer 10

powers

• maintenance - pay income to minor beneficiaries for their upkeep
• advancement - advance funds prior to the date specifed in the trust deed
• dispositions - discretion in a discretionary trust
• appoint nominees and custodians - therfore, able to settle stock market transactions using CREST
• appoint investment managers - appoint IMs on their behalf

duties

• keep the trust records, i.e. dealings
• deal and distribute assets in accordance to the trust
• invest the funds

investment criteria / advice

• have regard to the need for diversification
• suitability is to have consideration to the size and risk of investments
• obtaining advice before excersing power of investment, and when reviewing investments

Question 11

CIPs standardised approaches

Answer 11

• portfolio advice services - using model portfolios to meet requirements for different risk categories of clients
• DIM - in house or outsourced, where the adviser has some input into the investment stratergy
• DIFs - typically structured as an OEIC where the the distribnutor (usually adviser) exerts a measure of control over the fund design and management