Client Advice Flashcards
What the two types of investors?
Individual or retail investors - people
institutional investors - hedge funds
How are individual investors usually classified?
By wealth - retail, high net worth and very high net worth
What is the aim of the RDR?
To protect and enhance consumer confidenc
What does the Proceeds of Crime Act 2002 require?
Disclosure of info which might relate to financial crime
Is a fiduciary duty always owed to a client?
A court will rule so unless it was expressly written in terms which weren’t unfair
What are the consumer outcomes the FCA expects relating to TCF and Principles for Business 6?
- Corporate Culture
- Marketing
- Clear Info
- Suitability of advice
- fair product expectations
- absence of post sale barriers
In communications what must a firm not do?
Omit or obscure any duty or liability it may have under the regulatory system
If an entity like the FCA is a qualifying body, what does this enable them to do?
Tackle unfair terms
Who defines fairness and what is it?
FCA by agreement with CMA - terms are unfair is they cause a significant imbalance in the parties rights and obligations to the detriment of the consumer
What is the role of CMA?
Principle enforcer of Unfair Terms in Consumer Contracts regulations 1999
What are 3 points of an advisors fiduciary duty to his clients?
There should be no conflict of interests
they should act in clients best interests
they should disclose all facts in full
What can the FCA do to firms using unfair terms?
Challenge them
Make recommendations and apply for injunctions
Additionally it must investigate all complaints about unfair terms
If a contract includes an unfair term what happens?
The rest of the contract will remain valid if it can still exist without the unfair term
What will the FCA do when investigating unfairness?
Unless urgent it will write to a Firm requesting a response and after this it may escalate activities
What is the Financial Planning Process?
- Obtain relevant info (fact find)
- Establish and agree client objectives
- Process and analyse data
- Formulate recommendations
- Implement recommendations
- Review and Update
What are the two client objectives?
Maximise returns or match liabilities - these can work in unison to a degree
What is the difference between a nominal liability and a real liability?
nominal liability does change with inflation such as a bank loan.
real liability does change with inflation such as the cost of living for a pension
What is the Fact Find Process?
Advisor attains personal and financial info
there is no regulatory requirements surrounding it
if advisor wishes to obtain third party info e.g. fund performance the advisor needs a letter of authority from the client
both hard and soft facts can be asked
What are the types of risk
Capital - an asset value may change
Inflation
Interest rates - bank changes can have knock down effects
Shortfall - does make enough money
Investors tend to focus on capital risk investing in safe assets with low returns which have increased exposure to other factors
What is systematic risk?
Market risk
What is Non- systematic risk?
Specific Risk
Into what two Categories can risk be qualified?
Market or systematic risk
Specific or Non systematic risk
How can assets be diversified?
Asset Class
Within Asset Class
Fund Manager
What types of Investment are considered no risk?
NS+I and Gilts
What types of Investment are considered low risk?
Banks and Building Society Deposits
Cash ISA’s
Annuities
What types of Investment are considered low/medium risk?
Pre redemption Gilts
With profit funds
What types of Investment are considered medium risk?
Unit linked managed funds
Unit Trusts, OIEC and ICVC (UK)
Investment Trust (UK)
Property
What types of Investment are considered medium/high risk?
Overseas Funds
UK Equities
Commodities
What types of Investment are considered high risk?
VCT Unlisted shares warrants derivatives speculation EIS Entreprise Property Zone
What is discussed in Strategy?
Asset Allocations and limits but not stock or product recommendations
What are the Features of Active Management?
It is not always effective
Luck and timing or required to find ‘winners’
involves higher transaction costs
What are the features of Passive Management?
a common form is indexation where an index is selected and a fund is built to mirror it
these are called index or tracker funds
they won’t perform as well due to creation cost and tracking error as funds are created on a sample
What is a Hybrid?
An indexed core fund, peripheral or satellite fund which aims to beat the index and may use derivatives
What is tilting?
Holding all or a sample of an index but the manager can allocate unevenly if he thinks one is superior
What is a Closet tracker?
All asset may be within an index but this may not be the acknowledged policy
What are the key features of a review?
Must be held at least once a year and more for short term funds
Address - client circumstance
- performance review against a benchmark
- Potential portfolio rebalancing
What is the purpose of a Bench mark?
Comparable Analysis of performance
What are the important features of a Bench Mark?
it must be a relevant stock or index
PPM consultants have databases on -
short/long term investment returns
asset distribution
review specific portfolios against others
performance against benchmarks and market medians
Do FTSE Indices include dividends in valutation?
No, however bond indices like Citigroup do
What the key features for Bench Mark indices?
they must be -
specified and unambiguous
appropriate to nature and currency of a fund
invest-able
measurable
representative of achievable performance - arithmetic weighted
measures the relevant component of performance
When fund management is being outsourced what must be considered?
Past performance
Charges
Financial stability of the provider - this is key to with profits funds- they may wish to smooth returns by granting bonuses and may keep profit to give bonuses in bad year
Stability, independence and standing of trustee and fund custodian.
These are all very relevant as fund management is ripe for fraud
What are the two types of Pension Fund?
Defined benefit and defined Contribution
What is a DB pension?
Based on salary and number of years in service - there will be a specific return - occupational schemes are usually DB but DC are becoming more popular
It must make sure present value of liabilities equals present value of assets. Actuaries predict future liabilities and it is desirable to predict future cash flows to match payments. Because of this bonds should be in pension funds
They must consider longevity of life
What is a DC pension
general increase in value of contributions paid on behalf of employee.
Personal pensions are always DC
What assets will a pension typically hold?
real assets like equities and property.
small amounts of fixed interest
substantial index linked stocks as they guarantee real returns and bonds due to long durations being sensitive to interest rates.
What is the tax status of a pension fund?
contributions are normally tax free.
funds approved by HMRC pay no income or CGT however they cant reclaim the 10% net dividend
The only tax is defferred income tax payable on pensions in retirement.
What are the recent trends in the pension sector and why?
Over the last 15 years DB have become less used and DC more so
- DB have more liabilities due to longevity
- falling returns on schemes assets meaning higher contributions are needed to mainatin DB
- need to disclose schemes funding position in the companies financial statements
DB due to less financial certainty are reducing equity and increasing bonds. LDI strategies have been developed using derivatives to match more closely assets and liabilities.
What are the types of life assurance?
Term assessed- for a period of time
Whole life - capital sum paid at death
Endowment - associated with mortgages where savings are designed to pay off capital borrowed at the end of term policy, and life insurance will repay the mortgage should policy holder die
Who regulates Insurance?
PRA - its has interventionist powers due to FSMA 2000
there is greater regulation than pension
assurance and insurance are closely monitored to ensure solvency. This makes them more risk adverse than pensions funds but they have a different risk profile.
What are the features of the General Insurance?
match liabilities
short term so fixed interest
subject to normal tax
What are the tax features of Life assurance?
There is no tax relief on payment of premiums on new policies.
income and capital gains are taxable
proceeds paid for life policies are taxable unless they are a qualifying investment
How should asset allocation take place? I.e what should it do/consider
it should match liabilities
meet any ethical considerations
remain within risk tolerance
maximise fund performance
What are the 3 rules when satisfying client investment objectives?
diversify risk
Be aware of the best way to match liabilities- if these are monetary it will be bonds
asset allocation is a mix between matching liabilities and maximising performance
For a non tax fund like pension, why should stocks which deduct tax at source be avoided?
Even though the tax is reclaimable, there is oppurtunity cost
When advising individuals what must be done/considered
Client Questionnaire - where everything should be recorded and this comprehensive info gathering proves compliance
Client Attitudes
Objectives
Present Circumstances - assets and liabilities and maybe cash flow
Future client Circumstance
Analyse clients needs - essential for a recommendation, normal for clients not be able to meet liabilities
What are the types of compliance advisors must give before giving recommendations?
business card
SCDD/CIDD/info in other forms
terms of business letter
What are the three types of portfolio management?
Discretionary - doesnt ask client
Non-discretionary - asks client
execution only - does only what is told
How can individual investors be summarised?
source of wealth
amount of wealth
stage of life cycle
rule of thumb is invest what you can lose. therefore borrowing to invest is dangerous
What are the two types of wealth?
Active wealth
- earned wealth e.g. investing
- more confident and familiar with risk and have greater risk tolerance
- don’t like losing control
Passive wealth
- inheritance/savings
- less experienced
- need more security and have a lower risk tolerance
What are the four types of investors?
methodical
- analytical and factual
- slow decisions
- no emotion
- conservative investment approached
Individualist
- self confident
- no emotion
- do analysis and expect to meet long term goals
Cautious
- highly risk averse
- need security
- low risk investments
- don’t like making decisions or listening to others
- don’t use advisors
- low risk and low turnover
Spontaneous
- high turnover
- don’t trust advice
- occasionally successful, most are not due higher transaction costs due to a high turnover
Why can the quantity of wealth be hard to categorise?
wealth is a subjective thing
What should be done at the end of each tax year?
top up pensions plans and isa’s. Tax breaks shouldn’t be exclusively looked for as they may have higher charges
What are the key features of a review?
Usually occur annually e.g. life assurance it is best to do it on a birthday as this can be how policies are determined
Review dates aren’t fixed as things may change such as
- new taxes
- share price change
- new tax year
How must an advisor work?
within the scope of firm authorisation or as they are individually approved
they should also be aware of professional competance and job description and not work outside this
comms skills should search for hard and soft facts and use close and open ended questions
What are the key features of KYC?
it is a basic regulatory regime and part of the fiduciary duty
advisor must know what terms the client understands
Money guidance - this targets consumers with limited knowledge of finance
clear printed and website english can help firms increase clients and be more inclusive
A good presentations will ask if everyone understands
what should be included in a written report?
statement of client objectives
summary of income, assets and relevant circumstance or problems
appendices, inc data best presented seperately
the language used should be clear and suitable to the level of client understanding
product quotations, illustrations and brochures should be presented in an orderly way potentially with an index
What are dark and light green funds and what are the differences between them?
They are ethical funds taking into account ethical preferences.
Dark green funds use negative criteria to exclude investments
light green funds use positive criteria to include investments
What should be considered in a comprehensive plan?
regulations economic conditions client current financial position can liabilities be re-arranged what is the liquidity of client assets, tax position, client protection needed and their attitude and understanding of risk may change
