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IAD PAPER 2 > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

Nature of the client relationship

A

The relationship with the client is very important and it involves multiple aspects
Legal
Personal
Skills including organisation, technical competence, integrity

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2
Q

Information required form the client and how to get it.

A

This is the information needs to formulate the investment policy statement
Objectives, risk parameters, other information on situation.
This can done in a face to face meeting where the KYC is done. In the fact find.

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3
Q

Personal details needed form the client

A

Name, age , residential address
DOB
Marital status
Basic health information
Occupation
Nationality
Current income
Current outgoings
Other arrangements
Aspirations

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4
Q

Investment objectives form the client

A

These are split into
Income now
Income growth - what it needs to be in the future
Growth - the actual capital
Outright growth - the maximum returns.

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5
Q

Risk tolerance

A

Clients need to understand their risk tolerance so that the right strategies can be put into please for them. Risk tolerance is subjective and depends on the emotional make up of the client.

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6
Q

Liquidity and time horizons

A

You need to understand a client liquidity needs over the horizon in which they intend to invest to make sure the plan of the investment suits their needs. Also time frame is important because of the funds are needed for something then the strategy will be planned around this.

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7
Q

Tax status

A

It is crucial to understand an indervidual tax status and residency/ domicile to see what their tax liabilities will be and how best to go plan about their Allowences and wrappers.

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8
Q

Vulnerable clients

A

When providing investment support to these clients additional precautions need to be taken. To protect them and assist them. The four key drivers of vulnerability
Health
Relilence
Life event
Capacity
These changes included
Information presentation method change
Having trusted person there as well
Also ensuring any POA is present.

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9
Q

Advising on unregulated retail products

A

Unregulated products received a huge overhaul recent under FSMA to protect retail investors form miss selling. And incorrect product.

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10
Q

Robo advisors

A

This is where you use technology to invest instead of an in person advisor. The algorithms decide on your plan based on a brief survey. This will be into a diversified stratergies based on the information provided that suit your risk tolerance. It can also assess tax liabilities.

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11
Q

Advantages and disadvantages of robo-advisors

A

Ad
Easy account setup
Automated process
Low min balances
Low fees
Provide market solutions
Tax efficient
Remove behaviour biases of advisors
Dis:
Not personalised
Not for complex profolios
Fees and charges for no service
Limitations on the tech
Performance is not guaranteed

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12
Q

Fair treatment of customers (FTOC)

A

This is the fca agenda that places an emphases on treating clients correctly . This is in place to deliver 6 outcomes
Page 488.

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13
Q

Paying for advice

A

The regulations are loose on what can be charged for but all charges must be provided in advance including ongoing charges. This will be in the key features document. The advisor charging rules were aimed at stoping advisor pay effecting outcomes:
Advisor can’t receive commission from the providers
Level of service determines the price
All disclosed upfront
Ongoing charges are levied when the service is ongoing.

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14
Q

Monitoring and review

A

Financial planing is not a one off things as environments change and so does the information that plan was formulated on. This is because
Tax changes
Employment
Focuses change
This is why it is important reciew to ensure that the plan in place still best suits the client situation.
If however the initial advisor does not handle this re-review it is important to agree who will handle this later down the line.

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15
Q

Investment and speculation

A

It is important to understand the distinction between investment and speculation. Investment is a professional activity undertaken to yield a desired wealth benefits over a period of time frame. And a great deal of time and knowledge is dedicated to understanding the risk involved in this long term plan.
Speculation there is limited knowledge and understanding of risk and is based on profiting from short term process movements of individual securities.

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16
Q

Financial planning process.

A

Page 493

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17
Q

Determining client requirements

A

Advisors need to understand a client future needs and current needs to make sure that investing does. To get in the way of this as client may think investing is the best for them but if it is not then an advisor must say this to them and explain why.

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18
Q

Attitude to risk and capacity for loss

A

ATR this is how a client perceives risk and how much they want to take
Capacity for loss is how much the client can afford to lose and how loss may affect their financial situation.

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19
Q

Determining a clients risk profile

A

Objectives factors
Timescale
Commitments
Wealth
Life-cycle
Age
Subjective factors
Attitudes
Beliefs
Experainces
Knowledge

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20
Q

Risk profiles and investment solutions

A

This work of three risk descriptions cautious balanced and adventurous.
Page 497

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21
Q

Capacity for loss

A

This is about how much risk can a client afford to take not how much they want to take or they deem is comfortable for them. It is based on income and expenditure, assets and situation.

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22
Q

Developing strategy

A

Once the needs are established and objects are covered a strategy must be developed by
Asses areas of action
Prioritising tpcertain aspects of
Developing solutions

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23
Q

Producing a financial plan

A

This is the final stage of the process and is where you complete your recommission based off the client. And should include
Existing position
What needed addresses
Details about the solutions
What has been left for future planning.

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24
Q

Suitability and affordability

A

Firms must make sure investments and recommendations are suitable by assessing
Client knowledge
And level of risk they can bear.
The advice must be suitable and this is a legal obligation for advisors.

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25
Q

Principles for business

A

11 principles form the fca
Page 502

26
Q

Requirements to assess suitability

A

Client knowledge
Nature, volume frequency and time the client has
Level of education.

27
Q

Investment policy statement

A

Once information is gathered advisors must invest inline with the IPS. The policy will focus on
Active or passive management
Asset allocation
Risk
Tax Capital or income growth
Responsibility

28
Q

Product providers

A

Advisors must assess the appropriateness of a provider based on
Quality
Performance
Risk
Charges
Client service

29
Q

Responsible , sustainable and ethical consideration

A

Negative investment impacts equal negative screening
Positive screening have positive investment impacts

30
Q

Restrictions on portfolio construction and implications for performance

A

Restriction based on values and ethics may need to be applied depending on the investors choice
However the more restrictions the harder it will be to achieve usual market returns in comparison to an investor that has no restrictions.
Also these restrictions can increase risk inadvertently.

31
Q

Corporate social responsibility

A

CRS this is a cooperate self regulation that makes sure business operate in an ethical way. Adhering to laws and ethical practises and standards .

32
Q

Definition of investment

A

Examples
Shares in companies
Land rented
Interest baring loans
Units in CIS
Not investments
Land purchased to sell
Commodities

33
Q

Trustees power of investment

A

Following the trustee act of 2000 they have a wide power of investment as long as it is under trust law. However this is not the case if
Charitable trust company
The trust deed excluded investment/ the trust act itself.

34
Q

Investment policy for charities

A

The charity trustees must decide on an investment policy for their charity, record it clearly in writing and keep it under regular review. It should include
The need for recourses
Level of acceptable risk
Stance on responsible investing.

35
Q

Mixed motive investments

A

Charitable investments genially fall into one of two categories
Normal = which seeks to generate best possible return for an acceptable level of risk.
Or
Investments that seek to further the charities objectives but not deliver market rate financial returns.

36
Q

Taxation

A

In the uk most investment qualify for tax by HMRC. This can lead to restrictions of the charities relief. It is crucial that the investments made by a charity are for the benefit of the charity not tax avoidance.

37
Q

Investment for trusts

A

Personal trusts are separate legal entities that have authority to buy and sell and manage property for their beneficiaries. The trustees act covers 5 main areas
Duty of care
Powers they have
Power to appoint nominees and agents
Acquire land
Receive pay from work done
Trustees should be aware of
Duty of care
Their power
Rule on who they nominate.

38
Q

Duty of care

A

This is a law meaning trustees have to act with skill and care with the responsibilities they have. This law affects trustees investing trust moneys. Trustees are responsible for their agents also.

39
Q

Investment powers

A

Trustees have flexibility to make investments in any asset classes that are meant to create income or capital return. Their responsibility means:
They have to use skill
The investment must be right for the trust
They must consider a wide range
Has to be diversified.

40
Q

Appointment of nominees and agents

A

They have the power to appoint people to manage but they are responsible for their actions. The agreement must be made in writing. Based on some conditions
Investment manager is separate
Is not a trading company
Has insurance

41
Q

The advantages of repaying a mortgage and other borrowings.

A

When considering repaying debt or investing the below should be considered:
Wether debt is fixed
Any pencil items for early repayment
Interest rates if not fixed
Nature of the debt
Tax status.

42
Q

Investor circumstances

A

It is possible to identify the position in the finically life cycle a person is but this does not mean their circumstances are set. And identify the factors that can effect this circumstances is important. Wealth is one.

43
Q

Affordability and suitability

A

An advisor needs to consider factors that could effect the investor not just what effects the investments ie their personal circumetancpses changing and the impact that could have the investment

44
Q

Weighting asset allocations

A

Strategic asset allocation must be used to precisely weight a portfolio within different assets. This also needs to be reviewed regularly. Experienced based is where an advisor picks based on their knowledge and training:
60/40 allocation
Increased bond wealth ting
Increased stocks allocation as time period is longer.

45
Q

Rebalancing and portfolio turnover rate

A

Regular rebalance can help manage sqencing risk. This is the risk that the timings of withdrawals will have a negative effect on overall return. Perhaps once a year is best.
The frequency the securities in the portfolio are changed over a 12 month period is the portfolio turnover rate. The higher the rate the more active the management 20-30% is low.

46
Q

Fees and charges

A

Three main ones
Percentage based fees
Fixed fees
Hourly fees

47
Q

Asset accumulation and decumulation

A

Accumulation is the building of wealth and savings or value of investments. Decululation is the use of these assets in spending. Decumulation is an important part of finically planning as there should be an order to what you spend. Ie taking advantage of wrappers and allowences.

48
Q

Solutions for investors and change

A

Changing is not always good for investors but sometimes it can work in dynamic markets. For an advisor to decide on the solution they can consider
Goals and risk tolerance
Product characteristics
Diversification
Conduct due diligence of the investment provider

49
Q

Presenting recommendations

A

Providing a written report to clients is an important part of giving the financial advice. This report can include
Client objectives
Summary of income and assets
The recommendation itself and reasons
Appendices

50
Q

Client understanding

A

Regulators worldwide require firms to ensure clients understand and pay regard to their interest. Ensuring that a client has understood the investment recommendation is crucial part of an advisor responsibility. Advisors should encourage question asking and get clients to explain in different aspects in the meeting to ensure they fully understand.

51
Q

Consumer act

A

This is a set of law that protect indervidual when purchasing goods and services the consumer act of 2015 protects perplexing in the uk.

52
Q

Cooling off period

A

This is the period where indervidual scan go back on the ie decision with out any consequences. This has to be notified before or if not I’m deathly after the business I’m conducted.

53
Q

FOS

A

Client have 6 months to contact the FoS following receiving final response.

54
Q

Other fca regulations focus on

A

Financial promotions
Status disclosure
Terms of business
Execution only dealing
Charges and commission
Cancellation and cooling off.

55
Q

Performance benchmarks

A

Once a portfolio has been constructed you must agree a benchmark for it to properly compare it to. The properties of a benchmark should include.
Page 538

56
Q

Main ways a portfolio performance is measured is.

A

Comparison to a relevant bond or stock market index
Comparison with similar funds or a relevant university comparison.
Comparison with customer benchmark.

57
Q

Peer group benchmarking

A

This is comparison across a relevant peer group. Of similar funds and managers. There are multiple comparison organisations that help people understand performance.
However
Criticism is that it create a herd like mentality because no one wants to be the outlier in case it negatively effects review.

58
Q

Pension fund benchmarking

A

Pensions get a separate benchmarking because of there restrictions and objectives.

59
Q

After tax benchmarking

A

This is heard because investor specific tax status can effect performance this is why most benchmarking is done before tax.

60
Q

Alternative benchmarking

A

Ie customer index’s and peer group comparisons.

IAD PAPER 2 (8 decks)

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