Client Objectives and Advice Flashcards
What 3 categories are clients split into and what are their protection levels?
- Retail client - limited knowledge and experience, highly regulated, most protected
- Professional client - more knowledge, more experienced, less regulated
- Eligible counterparty - deemed to have the same amount of knowledge as the financial services firm, least protected
If an advisor does not have the knowledges, who should they seek help from?
Though it is unlikely, advisors can refer to a specialist, specialists are likely to come from within the firm e.g Caz investment team
How are clients assessed? (3)
Hard facts (objective details) - name, age, residency, dependents, health, marital status, address, employment details
Soft facts (subjective details) - hobbies, philosophies, views, previous experience
Many clients will not have information on their own files and therefore this may need to be collected from a third party - LoA is needed
What investment objectives needs to be identified? (7)
- Risk - what is the risk tolerance? (High the risk, higher the return, higher the equity allocation)
- Return - required return needed
- Time horizon - how long does the client want to be invested
- Liquidity - will the client need to draw on investments? Are withdrawals needed? Income?
- Tax - is there a tax bill due? What tax position is the client in
- Regulatory - trust, charities, pension funds (SIPPs)
- Other unique circumstances
What types of risks are faced by investors? (6)
- Capital risk
- Shortfall risk
- Inflation risk
- Interest rate risk
- Currency risk
- Operational risk
What is capital risk? (2)
- Equities, bonds, alternatives, commodities, property, gilts all face risk of capital loss
- Government products and national savings products protect against capital risk
What is interest rate risk?
- ## The rate is usually raised by the MPC during times of high inflation
What is inflation risk?
- Rising inflation affects value of investments unless investment returns higher than inflation rate e.g. real return
- Investors who choose cash deposits as their medium to long term investment face the highest inflation risk
- Equities aim to return excess in inflation
- Index linked gilts provide some protection to inflation
What is operational risk?
- People
- Processes
- External events
- Systems
What is shortfall risk?
Investment return falls short of the amount required to achieve the clients objective
- Dividends are not guaranteed as they depend on the companies profit
- Coupons on corporate bonds are not guaranteed as it depends on whether the issuer is willing to pay them
- ## Variable rate cash deposits have income risk - interests rates fall, interest payable falls
What is currency risk?
- If a foreign currency depreciates relative to sterling. SPICED
- Forward contracts provide protection against currency risk - a type of derivative that locks in forward exchange rate in a foreign currency. Should a foreign currency depreciate, a gain will be made on the forward contact which will offset the loss on the foreign asset
How can a firm determine a clients risk tolerance?
- Level of existing wealth
- Time horizon
- Age and familial situation / dependents
- Liquidity needs
- Spending requirements
- Financial flexibility
- Future financial requirements
**only invest what you are able to lose Is important here
How is risk reduced in a portfolio? (4)
Diversification
- Increasing holdings
- Investing in different regions, sectors and assets
When there is a diversified portfolio, what happens to systematic and non-systematic risk? (2)
- Diversification reduces non-systematic risk/specific risk (e.g. inflation risk) within the portfolio
- Doesn’t reduce systemic risk
What does specific risk include?
Industry, management and business risks
What does systematic risk include?
Interest rate risk, inflation risk and currency risk
What is the relationship between correlation and diversification? (3)
- Positive correlation - assets move in the same direction
- Negative correlation - assets move in the opposite direction e.g. equities and bonds
- The lower the correlation the greater the diversification benefits
What is the sequence of steps for financial planning? (6)
- Identify and quantify client objectives
- Collect data
- Analyse different options and identify shortcomings
- Prepare a report and arrange meeting with client
- Implement the plan
- Monitor and review plan
What is mean variance optimisation (MVO)? (3)
- A computer programme
- Optimises the risk-return relationship
- Maximise the return (mean) to minimise the risk (the variance)
How do you choose which fund to pick if they have similar performance and similar asset mix?
- Explicit costs (advisor fees, broker fees, management fees, stamp duty, PTM levy of LSE/Takeover Panel)
- Implicit costs (bid/offer spread, price impact of trade, opportunity cost, cost of dealing within the fund)
What are the various interest rates for borrowing?
BoE base - 0.5%
Mortgage - 2.5-6%
Unsecured loans - 7-15%
Credit cards - 15-20%
Store cards - 20-35%
What needs to be considered when repaying debt?
- Liquidity needs
- Ability to pay
- Overall risk tolerance
- Avoid early repayment penalties
- Repay firstly the debt with highest interest
- Important for clients to retain liquid assets for any future expenditure
- When borrowing, consider the ‘after tax’ investment return
How is investment performance benchmarked?
- Against relevant equity index
- Against sector
- Comparable managers/funds with similar investment objective
What is a will?
The wishes of an individual when they pass away
What is real property?
Land, buildings and rights over property - ‘real estate’
What is personal property?
Within the personal possession of a person - moveable property
What is a trust? (6)
- A legal arrangement
- Governed by a trust deed
- Settlor - the creator of the trust
- Trustee - legal owner who manages trust property
- Beneficiary - recipient of funds who benefits from the trust
- Trust property - anything that is put into legal ownership of the trustee
What are the features of a contract? (5)
- Consideration - both side must gain something e.g. fee/service
- Intention to contract
- Terms and conditions
- Types of contracts - written contracts are easier, though oral contracts are binding too
- Capacity to contract
What impacts an individuals capacity to contract? (4)
- A minor (under 18)
- A bankrupt person
- A mentally incapable person
- A drunk person
*Mental Capacity Act 2004
Why may a contract be terminated? (3)
- Lack on intention
- Unclear terms and conditions
- No mutual consideration
How can a contract be discharged? (4)
- Discharge by agreement - t&c fulfilled
- Discharge by performance - t&c fulfilled
- Discharge by frustration - t&c fulfilled
- Discharge by breach - t&c NOT fulfilled
What is a registered document? (2)
- Ownership is recorded on the central register
- Legal ownership e.g. DVLA
What is bearer instruments?
Proof of title is physical possession e.g. gold and diamonds
What is a nominee account? (2)
- Reduces the burden of admin
- Registered account
What is joint ownership? (2)
- Joint tenancy - on death, assets go to the survivor
- Tenants in common - assets do not go to the surviver, they are distributed to the estate according to the will
What is a power of attorney? (2)
- Assigned when someone does not have the capacity to contract
- Power to sign documents, make purchases, dispose property and handle financial affairs
What are the 3 types of power of attorneys?
- Specific - specific powers to PoA
- General - discretionary powers to PoA
- Lasting - appointed when the attorney is in sound mind and made should they lose capacity. Must be registered with Office of Public Guardianship
When can a POA be revoked? (3)
- After death
- The donor revokes the POA
- The donor goes bankrupt
What is insolvency? (2)
- When a company cannot pay its debts
- Liabilities outweigh assets
What are the 4 approaches to insolvency?
- Liquidation - the courts rule that the company should be wound up, assets sold and creditors repaid
- Company voluntary arrangement - a formal agreement to make repayments
- Informal arrangement - informal agreement to make repayments
- Administration - breathing space - protection from creditors until plan is in place
What is bankruptcy? (2)
- The legal state of companies and individuals being unable to pay their debts now and in the future
- Can be petitioned if debt is more than £5,000
Who cannot be made bankrupt? (3)
- The deceased
- An infant
- A spouse of a bankrupt person is treated as a separate individual meaning creditors have no claims to their assets
What is an individual voluntary arrangement? (2)
- Less expensive alternative to bankruptcy for individuals
- 75% of creditors need to vote in favour of the repayment plan
What are wills? (5)
- Specify how assets are to be distributed
- Who is responsible for children
- Who will benefit from estate
- Must be in writing, willingly made, by a person of mental capacity, by a person over 18 years of age, no pressure from anyone else
- Signed and witnessed by 2 individuals
What are the different types of trust? (4)
- Discretionary trust - trustees distribute assets at their discretion
- Bare trust - trustees takes a nominee role only for beneficiaries
- Interest in possession - beneficiaries gain rights to all the income from the trust, but not the trust itself
- Charitable trust - a discretionary trust set up as a company or companies - tax benefits
What Act are trusts governed by? (4)
- The Trustee Act 2000
- Trustees have a statutory duty of care
- Expected to act with a degree of skill and care which is appropriate to their knowledge, expertise and experience
- Should regularly review the investment at least once a year
What are the 2 types of investors in this unit?
- Individual including retail and professional clients
- Institutional including pension funds and insurance companies
What are the continuing obligations to clients? (3)
- Suitability
- Treating customers fairly
- The need to refer to specialists
What different assets are used to achieve objectives? (4)
- Income: bonds, gilts,
- Capital growth: equities
- Tax wrappers: EIS, VCTs
- Liquidity: cash
What is the difference between dying intestate and testate? (2)
- Died testate - valid will. Executors - carry out will and ‘grant probate’
- Died intestate - no will or no valid will. Administrators gain a letter of administration.
What is a deed of variation? (1)
- Can change the will of the deceased person to save the family money
What are national intestacy rules? (2)
- Encourage the person to dictate how assets are distributed
- Courts rather the person decide who is the guarding of their children
