Chapter 7

Question 1

Ruth is showing her husband the client agreement she has established with her new adviser. This is likely to include all of these elements EXCEPT:
Select one:
a. the frequency of adviser contact.
b. details of product charges.
c. the basis of the adviser remuneration.
d. the duration of the agreement.

Answer 1

b. details of product charges.

SEE CHAPTER 7A1A

Question 2

Georgia is a basic rate tax payer and makes a gain on some direct share holdings. It is TRUE to say that she:
Select one:
a. will only pay CGT at 20%.
b. may pay income tax at her highest marginal rate.
c. will only pay CGT at 10%.
d. may pay CGT at 10% and 20%.

Answer 2

d. may pay CGT at 10% and 20%.

SEE CHAPTER 7A1H

Question 3

Who has the greatest need to preserve capital?
Select one:
a. John, saving for a new yacht when he retires in 10 years.
b. Sheila, saving for her wedding in 6 years’ time.
c. Bob, saving for a house deposit over the next 3 years.
d. Jim, saving for university fees for his new-born twins.

Answer 3

c. Bob, saving for a house deposit over the next 3 years.

SEE CHAPTER 7B2A

Question 4

Martin, an IFA, is selecting a platform for his client Paul. The area that is LEAST likely to be a major consideration is the:
Select one:
a. range of investments available.
b. past performance of the investments.
c. cost to the client.
d. range of tax wrappers offered by the platform.

Answer 4

b. past performance of the investments.

SEE CHAPTER 7A1I

Question 5

At the start of a client relationship an adviser should provide the client with information about the scope of the services that are being offered and the cost of any work that the adviser will carry out. This information is usually contained in the:
Select one:
a. sales literature.
b. FCA rule book.
c. key features document.
d. client agreement.

Answer 5

d. client agreement.

SEE CHAPTER 7A1A

Question 6

When assessing a client’s attitude to risk, in respect of risk tolerance and capacity for loss it is fair to say that:
Select one:
a. risk tolerance is partly subjective and capacity for loss is a matter of fact.
b. they are both partly subjective.
c. risk tolerance is a matter of fact and capacity for loss is partly subjective.
d. they are both a matter of fact.

Answer 6

a. risk tolerance is partly subjective and capacity for loss is a matter of fact.

SEE CHAPTER 7B1A

Question 7

Due to the fact that James wishes to take an ethical approach with his investments, he:
Select one:
a. may take advantage of both positive and negative screening.
b. will have to make all investment decisions himself.
c. will only be able to take advantage of positive screening.
d. can expect to pay higher fees than non ethical investments.

Answer 7

a. may take advantage of both positive and negative screening.

SEE CHAPTER 7A1G

Question 8

Maurice has £250,000 to invest, an adventurous attitude to risk and wants to gross a return in excess of £325,000 in seven years. The PRIMARY consideration when constructing an investment portfolio for Maurice would be to:
Select one:
a. focus on the seven year investment term.
b. align it to his attitude to risk.
c. consider the relatively large investment amount.
d. focus on the absolute return required.

Answer 8

b. align it to his attitude to risk.

SEE CHAPTER 7B1

Question 9

Juliet, an ethical investor, only wishes to invest in companies that avoid dealing in alcohol and tobacco. The process she is adopting is best known as:
Select one:
a. negative screening.
b. positive screening. 
c. ethical screening.
d. green screening.

Answer 9

a. negative screening.

SEE CHAPTER 7A1G

Question 10

Tom, Dick and Harry all use the MSCI WMA benchmarks as a basis for their asset allocation. Tom uses the income index, Dick uses the balanced index and Harry uses the growth index. When looking at the asset allocations of their portfolios, this means that:
Select one:
a. Tom has more corporate bond assets than Dick and Harry.
b. Tom has more international equity assets than Dick and Harry.
c. they all have the same weighting in UK equities.
d. they all have the same weighting in cash.

Answer 10

a. Tom has more corporate bond assets than Dick and Harry.

SEE CHAPTER 7C1

Question 11

According to behavioural finance theory, people suffer pain and grief how much more intensely when they lose money than when they make money?
Select one:
a. Four times.
b. Three times.
c. Five times.
d. Two times.

Answer 11

d. Two times.

SEE CHAPTER 7A1D

Question 12

A cautious investor is considering some funds to include in their portfolio. Which of the following funds would be considered to be lower risk?
Select one:
a. High-yield bonds.
b. Gilt funds.
c. Emerging market bond funds.
d. Alpha funds.

Answer 12

b. Gilt funds.

SEE CHAPTER 7A1F

Question 13

Which of these clients has the lowest risk portfolio?
Select one:
a. Neil, with an equal mix of equity income funds and high-yield bond funds.
b. Paul, with an equal mix of equity income funds and alpha funds.
c. Andrew, with an equal mix of emerging market bond funds and smaller company funds.
d. Jan, with an equal mix of equity income funds and gilt funds.

Answer 13

d. Jan, with an equal mix of equity income funds and gilt funds.

SEE CHAPTER 7A1F

Question 14

Stevie has an investment which does not depend on investment performance, it therefore must be a[n]:
Select one:
a. defined benefit pension fund.
b. ISA containing stocks and shares.
c. OEIC.
d. personal pension scheme.

Answer 14

a. defined benefit pension fund.

SEE CHAPTER 7B1

Question 15

Miles, an IFA, is completing a fact-find with his new client Parminder. The LEAST important piece of information would be any:
Select one:
a. priority order of needs for Parminder.
b. objectives Parminder has.
c. needs and wants of Parminder.
d. taxation of Parminder’s existing products.

Answer 15

d. taxation of Parminder’s existing products.

SEE CHAPTER 7A1B

Question 16

Akeel took out a personal pension in May 2018. Generally, the best time to review this would be:
Select one:
a. at Akeel’s request only.
b. between November 2018 and May 2019, then annually thereafter.
c. August 2018 and then half yearly thereafter.
d. June 2018 and then quarterly thereafter.

Answer 16

b. between November 2018 and May 2019, then annually thereafter.

SEE CHAPTER 7A1K

Question 17

Joshua, an additional rate tax payer, holds a large proportion of his portfolio in tactical bond funds. His attitude to risk is MOST likely to be:
Select one:
a. medium risk.
b. high risk.
c. low risk. 
d. low to medium risk.

Answer 17

b. high risk.

SEE CHAPTER 7A1F

Question 18

Michael's portfolio manager has changed the asset allocation in his portfolio to align it closer to his risk profile. This process is best described as:
Select one:
a. encashing.
b. switching.
c. rebalancing. 
d. netting.

Answer 18

c. rebalancing.

SEE CHAPTER 7C4

Question 19

June is seeking the value of her investment to rise from both capital gains and the reinvestment of income. She is therefore looking for:
Select one:
a. capital preservation. 
b. capital appreciation.
c. capital erosion.
d. total return.

Answer 19

d. total return.

SEE CHAPTER 7B1B

Question 20

Neil's Income is £100,000 gross and his monthly expenditure is £3,000. How much should he generally keep as an emergency fund?
Select one:
a. £70,000.
b. £18,000 to £27,000.
c. £100,000.
d. £3,000 to £9,000

Answer 20

b. £18,000 to £27,000.

SEE CHAPTER 7B2A

Question 21

Which of these four clients would generally be considered to be taking the HIGHEST risk with their investment fund choice?
Select one:
a. Ralph, who is invested in the Medusa Corporate Bond All Stocks fund.
b. Thomas, who is invested in the Securebank UK Smaller Companies Alpha fund.
c. Gina, who is invested in the Hakuna Investments UK Income and Growth fund.
d. Sally, who is invested in the Venus UK Equity Income fund.

Answer 21

b. Thomas, who is invested in the Securebank UK Smaller Companies Alpha fund.

SEE CAHPTER 7A1F

Question 22

Fiona’s adviser has recommended a portfolio of investments including an investment grade corporate bond fund, a global government bond fund, an equity income fund and a technology fund. Which of these funds represents the GREATEST risk?
Select one:
a. The investment grade corporate bond fund.
b. The technology fund.
c. The global government bond fund.
d. The equity income fund.

Answer 22

b. The technology fund.

SEE CHAPTER 7A1F

Question 23

Simon’s adviser has determined that he is looking for a total return from his portfolio. This means that Simon can BEST be described as a[n]:
Select one:
a. longer-term investor whose priority is for their assets to grow in real terms by way of capital gains.
b. long-term investor who is looking for the growth in his portfolio to come from both capital gains and reinvestment of income.
c. risk-adverse investor who wishes to achieve a return equal to or above inflation.
d. investor who is focused on producing income rather than achieving capital gains.

Answer 23

b. long-term investor who is looking for the growth in his portfolio to come from both capital gains and reinvestment of income.

SEE CHAPTER 7B1B

Question 24

Ulrika requires income and her risk profile has been set as ‘cautious’. In recommending a portfolio for her the fund asset allocation is likely to have a[n]:
Select one:
a. greater amount in bonds than equities and a greater amount in equities than property.
b. greater amount in equities than bonds and a greater amount in bonds than property.
c. greater amount in bonds than property and a greater amount in property than equities.
d. equal split between equities and bonds with a greater amount in both than property.

Answer 24

a. greater amount in bonds than equities and a greater amount in equities than property.

SEE CHAPTER 7C1

Question 25

Sue, an adviser, is conducting a fact-find with her new client Janet. Based on the information Sue collected, an example of a ‘hard’ fact would be that Janet:
Select one:
a. is greatly influenced by her religious beliefs.
b. is highly risk adverse.
c. would like to act as a volunteer aid worker in her retirement.
d. works as a Communications Officer within the Civil Service.

Answer 25

d. works as a Communications Officer within the Civil Service.

SEE CHAPTER 7A1B

Question 26

Jacob has been recommended to invest within a wrap account. A key advantage of this approach for Jacob is:
Select one:
a. fund choice, as a greater number of funds are available within wrap accounts.
b. tax efficiency, as tax rebates are available for wrap account investments.
c. simplicity, as a single set of investments is managed across several wrappers.
d. cost, as investments within wrap accounts are always cheaper.

Answer 26

c. simplicity, as a single set of investments is managed across several wrappers.

SEE CHAPTER 7A1I

Question 27

‘Herding’ is a term used to describe the social phenomenon which causes:
Select one:
a. advisers to segment client groups by age and income alone.
b. people to follow others into popular areas of investment and in so doing to ignore any inherent risks.
c. e-commerce providers to offer limited product solutions based on diagnostic data.
d. advisers to ignore individual objectives and recommend similar tax wrapper solutions for all their clients.

Answer 27

b. people to follow others into popular areas of investment and in so doing to ignore any inherent risks.

SEE CHAPTER 7A1D

Question 28

Victor’s only source of income in retirement is his investment portfolio of £350,000. Which of these factors is LEAST relevant in projecting the portfolio’s future cash flows in decumulation?
Select one:
a. Victor’s highest marginal rate of tax.
b. The overall rate of income generated.
c. The initial yield on the investments.
d. The likely level of inflation and interest rates.

Answer 28

a. Victor’s highest marginal rate of tax.

SEE CHAPTER 7C5

Question 29

A client agreement would NOT typically include details of the:
Select one:
a. services to be provided.
b. adviser's qualifications. 
c. basis of remuneration.
d. duration of the agreement.

Answer 29

b. adviser’s qualifications.

SEE CHAPTER 7A1A

Question 30

Basil is confused between positive and negative screening. You explain that:
Select one:
a. negative screening concentrates on avoidance criteria whereas positive screening looks at investing in companies that have a more responsible approach.
b. avoiding companies that conduct animal testing is an example of positive screening.
c. positive screening concentrates on avoidance criteria whereas negative screening looks at investing in companies that have a more responsible approach.
d. investing in companies that reduce their carbon footprint is an example of negative screening.

Answer 30

a. negative screening concentrates on avoidance criteria whereas positive screening looks at investing in companies that have a more responsible approach.

SEE CHAPTER 7A1G

Question 31

A retired client explains to their investment adviser that a loss of 25% of their capital would lead to a similar reduction in income, resulting in an unacceptable reduction in standard of living. This is an example of the client’s:
Select one:
a. capacity for loss. 
b. attitude to risk.
c. tolerance of risk.
d. understanding of risk.

Answer 31

a. capacity for loss.

SEE CHAPTER 7A1D

Question 32

Malcolm has been presented with a client agreement prior to him meeting with his investment adviser. What is the document LEAST likely to mention?
Select one:
a. A statement of his investment objectives.
b. How long the agreement will last for.
c. The cost of the adviser’s service.
d. The service that will be provided.

Answer 32

a. A statement of his investment objectives.

SEE CHAPTER 7A1A

Question 33

When a financial adviser provides a client with the client agreement, this will include:
Select one:
a. the level of risk the client is prepared to take.
b. the basis of how the adviser will be remunerated.
c. a description of the client’s investment aims.
d. confirmation of the amount to be invested.

Answer 33

b. the basis of how the adviser will be remunerated.

SEE CHAPTER 7A1A

Question 34

Howard, a financial adviser, is providing investment advice to a new client, Kate. Which part of the investment process would Howard complete FIRST?
Select one:
a. Recommend that the assets should be allocated 50% to equities, 30% to bonds and 10% each to property and cash.
b. Discover that Kate’s key objective is to help fund her son’s university costs.
c. Advise that Kate should invest in an ISA tax wrapper.
d. Assess and agree Kate’s risk profile.

Answer 34

b. Discover that Kate’s key objective is to help fund her son’s university costs.

SEE CHAPTER 7A1

Question 35

Georgia has a large tax liability to pay in 9 months’ time. The MOST suitable investment(s) for her funds to pay for this bill is / are:
Select one:
a. high yielding corporate bonds.
b. long dated gilts.
c. a portfolio of 15-20 ‘blue chip’ equities.
d. a 9 months fixed term deposit.

Answer 35

d. a 9 months fixed term deposit.

SEE CHAPTER 7B2A

Question 36

Gary, a financial adviser, is providing investment advice to a new client, Jody. Which element of the process would Gary establish last?
Select one:
a. His understanding of Jody’s key objective to help fund a comfortable retirement.
b. His assessment that Jody has a ‘moderately adventurous’ risk profile.
c. His recommendation that Jody should invest in a SIPP tax wrapper.
d. His analysis that the assets should be allocated 70% to equities, 20% to bonds and 5% each to property and cash.

Answer 36

c. His recommendation that Jody should invest in a SIPP tax wrapper.

SEE CHAPTER 7A1H

Question 37

Which of these four clients would generally be considered to be taking the LOWEST risk with their investment fund choice?
Select one:
a. Sally, who is invested in the Venus UK Alpha Plus fund.
b. Gina, who is invested in the Hakuna Investments UK Income and Growth fund.
c. Ralph, who is invested in the P&M Tactical Bond fund.
d. Thomas, who is invested in the Securebank UK Smaller Companies fund.

Answer 37

c. Ralph, who is invested in the P&M Tactical Bond fund.

SEE CHAPTER 7A1F

Question 38

Stewart, who has a medium attitude to risk, has existing investments and a further lump sum he wishes to invest. After a review of his existing investments, it has been recommended that he place all of his new lump sum investment into property-based funds. This recommendation is justified because:
Select one:
a. the value of his main residence has doubled in the last 15 years.
b. interest rates are expected to rise.
c. he is a basic rate taxpayer.
d. his current portfolio lacks sufficient diversification.

Answer 38

d. his current portfolio lacks sufficient diversification.

SEE CHAPTER 7A1E

Question 39

Tony is conducting a fact-find on Keith, a new client. Which of these facts about Keith would be regarded as a ‘soft’ fact?
Select one:
a. He is employed as a delivery driver.
b. He has a number of previous investments, including a large equity portfolio.
c. He wants to move closer to his grandchildren in retirement.
d. He has been married, and divorced, twice.

Answer 39

c. He wants to move closer to his grandchildren in retirement.

SEE CHAPTER 7A1B

Question 40

Thomas, who is a higher rate taxpayer, has a holding of equity unit trusts and his adviser has recommended moving part of his portfolio into a stocks and shares based Individual Savings Account as he had used his dividend allowance elsewhere. On a dividend of £270, this will result in an income tax saving of:
Select one:
a. £102.87.
b. £67.50.
c. £87.75. 
d. £60.75.

Answer 40

c. £87.75.

SEE CHAPTER 7A1H

Question 41

Mark's net income is £3,000 per month and his expenditure is £2,000. Over and above any planned expenditure, Mark should keep an emergency fund in the range of:
Select one:
a. £12,000 to £18,000.
b. £18,000 to £24,000.
c. £27,000 to £36,000.
d. £18,000 to £27,000.

Answer 41

a. £12,000 to £18,000.

SEE CHAPTER 7B2A

Question 42

Zara, a client, has specifically requested her adviser to consider Sharia investments. This is LIKELY to be because Zara:
Select one:
a. has strong views on animal rights.
b. is a Muslim. 
c. is very keen on 'green' issues.
d. has a very cautious attitude to risk.

Answer 42

b. is a Muslim.

SEE CHAPTER 7A1G

Question 43

Barry, 67, has little pension income and relies on investment income to maintain his standard of living. In projecting portfolio cash flows in decumulation, his adviser will take account of all of these factors, APART from:
Select one:
a. the level of inflation.
b. probable growth rate of company dividends.
c. interest rates.
d. the adviser’s charging structure.

Answer 43

d. the adviser’s charging structure.

SEE CHAPTER 7C5

Question 44

Dennis, an adviser, is attempting to judge how achievable his client’s objectives are. The MOST appropriate way for him to achieve this is by:
Select one:
a. asking his client what they feel they can afford to commit to meet their objectives.
b. obtaining cash flow projections and assessing his client’s future requirements for income and capital.
c. looking at his client’s recent bank statements.
d. assessing his client’s income and expenditure over recent years.

Answer 44

b. obtaining cash flow projections and assessing his client’s future requirements for income and capital.

SEE CHAPTER 7A1C

Question 45

Samantha is a long-term investor for whom growth in the value of her assets in real terms is a priority. She is expecting growth primarily from capital gains. What is MOST likely to be her return objective?
Select one:
a. Current income.
b. Capital preservation.
c. Capital appreciation.
d. Total return.

Answer 45

c. Capital appreciation.

SEE CHAPTER 7B1B

Question 46

Nikita, an adventurous investor, has been advised to invest in a six-month fixed-term deposit account. The MOST likely reason for this is that:
Select one:
a. she is an additional rate taxpayer.
b. she has a short-term capital requirement.
c. her adviser is highly risk adverse.
d. she needs to diversify her investments.

Answer 46

b. she has a short-term capital requirement.

SEE CHAPTER 7B2A

Question 47

Wasim’s risk profile has been set as ‘balanced income’. In recommending a portfolio for him the fund asset allocation is likely to have:
Select one:
a. an equal split between equities and bonds with a greater amount in both than property.
b. a greater amount in bonds than equities and a greater amount in equities than property.
c. a greater amount in bonds than property and a greater amount in property than equities.
d. a greater amount in equities than bonds and a greater amount in bonds than property.

Answer 47

d. a greater amount in equities than bonds and a greater amount in bonds than property.

SEE CHAPTER 7C1

Question 48

Mark, an adviser, is attempting to establish the risk profile of a new client, Jon. The one OBJECTIVE element in the process is to ascertain Jon’s:
Select one:
a. tolerance of risk, determined by the degree of volatility in investment returns Jon is willing to withstand.
b. tolerance of risk, determined partly by the resources Jon has available.
c. capacity for loss, determined by Jon’s views about his past experience of investments.
d. capacity for loss, which is determined partly by the resources Jon has available.

Answer 48

d. capacity for loss, which is determined partly by the resources Jon has available.

SEE CHAPTER 7A1D

Question 49

Which fund management style is MOST likely to work best during periods of rapid growth?
Select one:
a. Momentum. 
b. Absolute return.
c. Value-based.
d. Passive.

Answer 49

a. Momentum.

SEE CHAPTER 7C2

Question 50

Trevor, 28, is an extremely wealthy client with an adventurous attitude to risk. He is keen to invest in equities as he sees these as the best route to capital growth. Which type of investment tax wrapper is MOST likely to be suitable for him?
Select one:
a. Offshore Bond. 
b. Onshore Bond.
c. Enterprise Investment Scheme.
d. Pension.

Answer 50

c. Enterprise Investment Scheme.

SEE CHAPTER 7A1H

Question 51

Donny wishes to invest in an ethical way, avoiding companies that make profit from alcohol or tobacco and investing in companies that attempt to be carbon neutral. What strategy is MOST likely to help Donny achieve his goal?
Select one:
a. Use negative screening only.
b. Use both positive and negative screening.
c. Use positive screening only.
d. Buy a managed ethical fund.

Answer 51

b. Use both positive and negative screening.

SEE CHAPTER 7A1G

Question 52

Gina is a relatively cautious investor. In terms of the fixed income part of her portfolio, the MOST suitable investment would be:
Select one:
a. tactical bond funds.
b. a mixture of short dated gilts and corporate bonds with a high credit rating.
c. high yielding corporate bonds.
d. a mixture of long dated gilts and corporate bonds with a low credit rating.

Answer 52

b. a mixture of short dated gilts and corporate bonds with a high credit rating.

SEE CHAPTER 7A1F

Question 53

Ben's investment aim is out-and-out capital growth. The most appropriate asset allocation technique is:
Select one:
a. arbitraging.
b. capital concentration.
c. pound cost averaging. I
d. capital diversification.

Answer 53

b. capital concentration.

SEE CHAPTER 7C3