Chapter 6 - Investment Advice Process

Question 1

Providing Advice

Answer 1

Engage
Education
Risk
Capacity for loss
Special Care - 80 and 85, even joint. Except ISA top up

Question 2

Time

Answer 2

Short - preserve capital value
Older clients - long term?
Considerations on death - beneficiary plans
Documented succession planning - beneficiary at meeting, or phone call, or copy of SL

Question 3

Debt v investment

Emergency funds - 3 or 6 if over 80

Answer 3

Consider

Plus existing portfolio re tax, etc

Question 4

Investment corridors

Answer 4

70 - 79.....65%-80%
80 - 84.....50%-75%
85 - 89.....35%-60%
90+.....20%-40%
Unless succession planning.

Question 5

Considerations

Answer 5

Health and life expectancy
Level of existing investments
ATR
Experience
Capacity for loss
Fund selection - less risk when older

Question 6

Tax wrappers

Answer 6

Isa then UT v Bonds
UT…use CGT each year.
VCT and EIS - Minority of clients
Beware ethical and socially responsible might be driver

Ethical funds use:-
Positive screening - focus on company themes or best practice or alternative energy sources
Negative screening or avoidance - look at company ethical issues, e.g., tobacco, fur, etc

Question 7

Creating Risk Profile

Answer 7

Behavioural finance! Loss felt twice as much badly as gain is good.
Risk is psychological

Herding…people imitate others!

Capacity for loss - this is objective.

Question 8

Requirement to pass to future generations

Answer 8

More relevant in later life

Question 9

Analyse situation

Answer 9

Start with ‘hoped for’ then temper to suit.

Question 10

Asset Allocation

Answer 10

Risk v return
Portfolio Optimisation
Volatility for given return is called ‘efficient frontier’
Correlation - lowest correlation contributes most to reducing risk.

Optimisation Assumptions
Risk, Historic Data, Forecasts, Costs, Implementation

Strategic Asset Allocation - for long term, ideal, should conform to goals and needs

Tactical Asset Allocation - Maximise short term opportunities. More onus on adviser. Volatility can be higher.

Question 11

Stochastic Modelling

Answer 11

Maths to show probable returns and volatility. I.E…you have x% chance of achieving desired return. Best guess, scientific? Informed choices,helps determine asset allocation, needs accuracy of assumptions, prediction not certainty.

Question 12

Alignment with Client Objectives

Answer 12

Risk tolerance

Risk capacity

Question 13

Active Investment Management

Answer 13

Sector and geography
Sector weightings, e.g., mining, pharma, etc
Stock or fund selection
Higher fees?

Question 14

Fund Management Styles

Answer 14

Value - Buy and hold businesses identified as higher value than current price.
GAARP - Growth at Reasonable Price - long term sustainable advantage.
Momentum - middle of the road
Contrarianism - go against the trend, e.g., hedge funds

Question 15

Passive Investment Management

Answer 15

Replicate performance of an index
Low charges
Limit volatility

Question 16

Discretionary Management

Answer 16

Make sure in line with client objectives, risk, etc.

Ensure tax is managed

Question 17

SJP Core Principlies

Answer 17

Sufficient Emergency funds
First instance - pensions and ISAs
Unit Trust Feeder thereafter
Remainder of time. UT v Bonds
Assumed future returns as well as tax wrapper diversification
Elderly clients - investment corridors!
Fund Administration Bonds for clients who want wider range outside SJP funds.
VCT & EIS. Higher risk
Ongoing Client Reviews

Question 18

Replacement Business

Answer 18

No financial disadvantage

Outperformance strong if slight cost to move

Question 19

Reviews!!

Answer 19

Questions and concerns
Goals and objectives
Current strategy, liquid assets, tax relief use, performance, rebalancing, planned actions.

Outcomes
No change
Adjust income
Adjust portfolio or funds
Rebalance
Switch between UTs.
Structure adjustment

Question 20

Top - Down Portfolio

Answer 20

1. Asset allocation
2. Geographical
3. Sector
4. Fund of stocks (ethical, social, income, performance)

Question 21

Bottom up

Answer 21

No index or benchmarks
Managers select on own criteria -
   Value
   Momentum
   Growth At A Reasonable Price (GAARP)
May be significantly weighted to sectors or countries

Question 22

Passives advantages and drawbacks

Answer 22

ADVANTAGES
Low charges
Follows index, no ongoing decisions
Many active managed funds don't outperform index
Diversified through a range of trackers

DRAWBACKS
Will underperform index
Concentrated - eg FTSE oil pharma
No preferred holdings
No safe harbour in strife

Question 23

Stochastic Modelling

Adv Disadv

Answer 23

ADVANTAGES
Range of scenarios given risk
Returns visual % easy understand
Helps informed choice
Returns preferred determine Asset Allocation

DISADVANTAGES
historical data
best guess
accuracy of assumptions
Prediction not certainty