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IMC Unit 1 > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

Planning Process

A
  1. Identify and quantify the client’s financial objectives
    - Risk and return
  2. Collect data to establish the client’s current situation
    - Hard and soft facts
    - Letter of authority could be used
  3. Analyse different options to meet identified shortcomings
  4. Prepare a report and arrange a meeting
  5. Implement the plan
  6. Monitor and review (at least annually)
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2
Q

Letter of Authority

A

Signed by client that gives permission to third parties for them to reveal information about the client

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3
Q

Investment Policy Statement

A

Formed from objectives and fact finding conducted by financial planner
Risk - how much is client willing/able to take
Return - required to deliver the desired final portfolio
Liquidity - for withdrawals and cashflow management
Time horizons - key points and investment duration
Tax - and anticipated changes to it
Regulatory considerations - trusts, charities, and pension funds have constraints
Other - the investor may have certain preference, e.g. ESG

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4
Q

Risk Objective

A

Ability and willingness form the overall assessment of the client’s risk tolerance
Ability to take risk (objective) - existing wealth (capital risk), time horizons, existing & future commitments, age & family
Willingness (subjective) - views, feelings, preferences, prior experience, perhaps collected through a questionnaire / assessment

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5
Q

Capital Risk

A

Fall in value of the capital invested

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6
Q

Income Risk

A

Income may fall, cease, or not rise as expected

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7
Q

Currency Risk

A

When investing overseas, FX exposure

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8
Q

Inflation Risk

A

Erosion of capital, though good for borrowers

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9
Q

Interest Rate Risk

A

Usually increases as inflation increases but there are commonly dislocations, better for savers

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10
Q

Shortfall Risk

A

Investment does not produce sufficient gains to meet future neeeds

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11
Q

Operational Risk

A

Mistakes caused by people, processes, systems and external events

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12
Q

Portfolio Risk

A

Associated with a collection of assets which can be mitigated through appropriate diversification

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13
Q

Diversification

A

Holding a variety of real and financial assets, risk is inversely proportional to the number of holdings, industries, asset class types, and countries in which instruments are held

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14
Q

Registered Securities

A

Legal title determined by the name of the register
Takes time and cost to transfer registered securities

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15
Q

Bearer Securities

A

Legal title determined by the holder who has possession of securities
Easier to transfer securities but harded to determine accurate owner (financial crime risk)

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16
Q

Nominee Accounts

A

Registered securities held in electronic form, separate nominee of assets from the crest account owner for client asset purposes

17
Q

Joint Ownership

A

Two or more own a stake in an asset, either through joint tenancy or tenants in common

18
Q

Joint Tenancy

A

Each owner has a 100% interest in the property
On the death of one party, total ownership is transferred to the other parties

19
Q

Tenants in Common

A

Each owner has a specified percentage share in the property
On the death of one party, their share is passed based on the will of the deceased party

20
Q

Contract

A

Formed when an offer is made from one party stating specific terms and conditions, and the receiving party has unconditionally and willing accepted

21
Q

Void Contract

A

Legally unenforceable

22
Q

Discharged

A

The legal end of the contract, until which point the contract is in place and valid

23
Q

Discharge by Agreement

A

Both parties mutually agree to terminate the contract

24
Q

Discharge by Performance

A

Terms and conditions of contract have been met in full

25
Q

Discharge by Frustration

A

External events prevent the contract being fulfilled

26
Q

Discharge by Breach

A

One side is unable to fulfil their side of the agreement, likely to lead to legal disputes

27
Q

Power of Attorney

A

One person (the donor) gives powers to another (the donee) to take certain decisions on their behalf
- Sign documents
- Make purchases
- Dispose of property
- Handle financial affairs

28
Q

Lasting Power of Attorney

A

Given by person who is in sound mind if worried about future event where they become metnally incapable
Only kicks in when person loses capababilities and is registered with the Office of the Public Guardian

29
Q

Insolvency

A

A state in which a company is unable to pay its debts leading to bankruptcy, receivership or liquidation

30
Q

Bankruptcy

A

Process of liquidating assets in order to repay some of the debtor’s liabilities
Maybe via a debtors petition - person voluntarily submits to court
Maybe via a creditors petition - owed persons request to court

31
Q

Receivership

A

Take possession of company away from owners of the company
The company is kept running as a going concern and should achieve a higher valuation as still operational

32
Q

Will

A

Legal document that someone creates when still alive for after their death their assets to be allocated and who should benefit from their estate
Must have capacity to contract
Executors of the will are granted probate by the courts, the executors then pay any and all debts before allocating as per the will
If persons die without a will then the national intestacy rules applyNati

33
Q

National Intestacy Rules

A

Allocation of estate based on distribution, from nearest family members to most distant
Spouse and children will receive assets by default
If no appropriate people can be found, the state collects all assets from that persons estate

34
Q

Trust

A

Legal arrangement created by settlor who wants to reliquish control of an asset by placing it into trust
Asset then used to create benefits for one or more beneficiaries of the trust
Settlor has to reliquish control of assets to release benefits, and a trustee is appointed to oversee operation of the trust and becomes its legal owner

35
Q

Trust Deed

A

Describes assets held, who the trustee is, the powers they have and the beneficiaries of the trust

36
Q

Discretionary Trust

A

Trustee has absolute discretion to distribute income to beneficiaries as they see fit

37
Q

Interest in Possession

A

Also known as life interest trust
Life tenant - beneficiary entitled to receive income but cannot disolve or take possession of assets directly
Once it ends, the remainderman who then takes possession of assets

38
Q

Bare Trusts

A

Trustee acts as a nominee only to separate legal assets
Obeys instructions of beneficiaries
Commonly used for grandchildren to inherit assets from their grandparents

39
Q

Trustee Act 2000

A

UK law to govern operations of trust
Trust deed is set up by settlor which sets up specific powers of the trustees
Law states that trustees have a duty of care when selecting investments and must act with appropriate skill and care, and seek professional advice where necessary

IMC Unit 1 (10 decks)

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