Chapter 7: Investment Advice Flashcards
After establishing the personal details of an investor, what is the first thing you should do before recommending any investment products?
A. Establish current income and expenditure
B. Explain the technical jargon related to the investment products
C. Explain the general state of the economy
D. Determine the financial situation of the investor
D. Determine the financial situation of the investor.
This is the best answer. Establishing the investor’s current financial situation gives the financial advisor a basis on which to move forward. This would look at their current investments and their current liabilities - such as mortgages, overdrafts and credit cards.
After this, the advisor is likely to look at the income and expenditure of the client.
To ensure a client understands, you:
A. Ask them questions
B. Get them to ask you questions
C. Ask them to explain the product solution to you
D. Send them a suitability report
B. Get them to ask you questions.
Getting the investor to ask you questions is the best answer. You should check whether the client has read and understood the report and ascertain whether they have any questions about it.
In relation to ethical and socially responsible investment, which of the following is CORRECT?
I. Both types of investing DECREASE the risk of a portfolio
II. Both types of investing INCREASE the returns of a portfolio over the short- to medium-term
A. I only
B. II only
C. Both
D. Neither
D. Neither.
Ethical and socially responsible investments limit the range of companies that can be included in a portfolio, potentially increasing risk through a lack of diversification.
Over the short- to medium-term, returns are unlikely to be positively affected. Socially Responsible Investing (SRI) is, after all, generally basing decisions on non-investment criteria. However, advocates of SRI believe that these companies will be better managed and better run, with a view to long-term sustainable growth, claiming that in the long-run SRI will outperform the less responsible companies.
You are the financial adviser of a new client. After carrying out a thorough fact-finding exercise, you have established that your client has strong ethical beliefs that he would like to be reflected within the portfolio you are constructing on his behalf. Your client would also like an international mix within his portfolio.
In order to produce a valid benchmark to which you can compare the portfolio’s performance, which of the following is NOT an index that you might use?
A. The FTSE 4Good Index
B. The FTSE KLD400 index
C. The EIRIS index
D. The Calvert index
C. The Ethical Investment Research Service (EIRIS) provides research and guidance to organisations and investors interested in such an investment approach. It is an organisation, not an index - though it can offer assistance to firms wishing to construct composite indices to assess performance.
The other three indices mentioned are specifically designed to capture shares of companies with strong social, environmental and ethical credentials.
Which of the main branches within Islamic finance deals with profit-sharing partnerships?
A. Murabaha
B. Musharaka
C. Ijara-wa-Iqtina
D. Ijara
B. Musharaka.
For Musharaka, the terms are agreed in advance, and losses are pegged to the amount invested.
- Murabaha refers to a form of interest-free credit.
- Ijara-wa-Iqtina refers to a leasing agreement where the client can buy the item at the period end.
- Ijara is similar except that the client cannot buy the item at the end.
Which of the following is NOT a stage in top-down active management?
A. Management selection
B. Asset allocation
C. Sector selection
D. Stock selection
A. The top-down stages refer to the points after the manager has been selected.
They are as follows: - Asset allocation, - Sector selection, - Stock selection.
In core satellite management, the correct description would be that:
A. The core portfolio is managed actively, and the satellites passively
B. The core portfolio is managed semi-actively, and the satellites passively
C. The core portfolio is managed passively, and the satellites actively
D. The core portfolio is managed passively, and satellites passively
C. Core-satellite management is when the core portfolio is managed passively and the satellites actively.
The core can also be managed semi-actively.
Which of the following is most likely to be a positive social factor in relation to ESG investing?
A. A commitment to a fair balance of females and males on the board of directors
B. The commitment to zero carbon targets rather than carbon neutral
C. The interrogation of supply lines to ensure fair wages for workers
D. Providing services in-house to minimise interaction with the wider community
C. The interrogation of supply lines to ensure fair wages for workers is a positive social factor.
- Providing services in-house to minimise interaction with the wider community is neutral at best and possibly negative, as the community will not benefit from the trade.
- The commitment to zero carbon targets rather than carbon neutral is a positive environmental factor.
- A commitment to a fair balance of females and males on the board of directors is a positive governance factor.
The RDR requirements of the FCA changed the nature of the way in which advisers are paid for giving investors advice. Which of the following statements is FALSE regarding the new remuneration regime for advisers?
A. New RDR requirements are specifically aimed at addressing the potential for adviser remuneration to change consumer outcomes.
B. Advisers should disclose those charges to consumers up front, using some form of price list or tariff and confirming the specific amount to be paid later on
C. The new RDR remuneration regime applies equally to both advised and non-advised services
D. The new remuneration regime is specifically intended to reduce the threat of product or provider bias to the suitability of the advice being sold to the investor
C. Non-advised services, or execution-only sales, where no advice or recommendation is given, fall outside of the adviser-charging regime.
Which of the following would likely be considered an UNSUITABLE investment for a charity trustee?
A. Buying interest-bearing loans
B. Leasing property with a view to sub-leasing
C. Purchasing land with a view to leasing
D. Holding equity
B. The emphasis is placed on investments that provide short-term income to meet the liquidity needs of the charity.
- Purchased land could be leased out to provide short-term income and it is likely to appreciate over the long term.
- Leased land may not be able to be sublet so this would be a short-term cost without short-term income and it is likely to reduce in value over the long term, depleting capital.
If a charity trustee is not invoking any of the powers granted in the Trustee Act, which of the following is true?
A. The Trustee Act specifies certain recommended practices which can be followed
B. The Trustee Act specifies certain mandatory practices which must be followed
C. The Trustee Act is not applicable and can be ignored
D. The Trustee Act is not applicable and must be ignored
B. The Trustee Act defines certain standards that must be followed regardless.
What does EIRIS stand for?
A. Ethical International Research Service
B. Ethical International Research Investment Service
C. Ethical Investment Research Service
D. Ethical Investment Research International Service
C. Ethical Investment Research Service.
The organisation EIRIS (the Ethical Investment Research Service) provides research and guidance for organisations and investors interested in such an investment approach.
Which of the following best reflects the goal of the Commission on Environmental, Social and Governance (CESG)?
A. To integrate ESG issues in relation to corporate performance into the traditional investment analysis
B. To challenge the profit maximisation culture of traditional economics
C. To hold the governing bodies of companies to account for breaches in socially responsible behaviour
D. To ensure political perspectives are aligned with industry goals
A. To integrate ESG issues in relation to corporate performance into the traditional investment analysis.
CESG’s main objective is to facilitate the integration aspects of ESG issues in relation to corporate performance into investment processes.
Members are predominantly fund managers, financial analysts and equity sector specialists and the committee
has been considering processes that need to become more and more a part of traditional investment analysis (mainstreaming).
Jonathan Hart is single, aged 40, and earns £70,000 pa as a self-employed management consultant. He has a mortgage of £200,000 and personal loans of £10,000. Jonathan is concerned about becoming ill and not being able to continue to meet his commitments.
Which policy would you recommend for this client as most suitable for his circumstances?
A. Critical illness cover
B. Life assurance and critical illness
C. Income replacement
D. Medical insurance
C. Income replacement.
Income protection insurance can be a valuable form of protection for a client with dependants, to protect them against their loss of income if they cannot work. Although Jonathan is single, he states that he wishes to continue to meet his commitments.
Critical illness insurance (CII) pays out a lump sum on the diagnosis of certain serious conditions, including cancer and certain heart conditions. However, there is no ongoing protection from these policies.
