Financial Advise

Question 1

What is financial advice?

Answer 1

Financial advice is the help given to an individual when a financial adviser considers their financial needs and recommends products to meet them. A financial adviser can give advice about an individual’s finances as a whole, or about one particular need that they have.

Question 2

Budgeting means an individual is:

Answer 2

1. less likely to end up in debt
2. less likely to be caught out by unexpected costs
3. more likely to have a good credit rating
4. more likely to be accepted for a mortgage or loan
5. able to spot areas where they can make savings, and
6. able to save for planned spending or just for the future.

Question 3

What is important to consider while borrowing money?

Answer 3

1. the interest rate and the annual percentage rate (APR)
2. how much will be repaid in total
3. any penalties that may be incurred for missed or late payments, and
4. the cost per week/month and whether this might vary

Question 4

Protection

Answer 4

Financial stability and protection should be considered at some level by all consumers. The protection required will, of course, depend on a number of circumstances including, for example, requirements and available income. There are four main areas that might be in need of protection – family and personal, mortgage, long-term care and business. To assess what type of protection is required involves the adviser exploring with the client what might happen and what the consequences might be. Although none of us can predict the future, it does not prevent us from considering future events and then assessing whether we are prepared for them. These areas are serviced by a wide range of protection products marketed by insurance companies.

Question 5

Critical Illness Insurance Cover

Answer 5

Critical illness cover is designed to pay a lump sum in the event that a person suffers from any one of a wide range of critical illnesses. Looking at how many people suffer from a major illness before they reach 65, its use and value can readily be seen. Illness may force an individual to give up work and so could cause financial hardship.

Question 6

What are some key features of Illness policies?

Answer 6

1. The critical illnesses covered will be clearly defined, eg, illness resulting from activities such as war or civil unrest will not be covered.
2. Critical illness cover is usually available to those aged between 18 and 64 years of age and often must end before an individual’s 70th birthday. It will pay out a lump sum if an individual is diagnosed with a critical illness and will normally be tax free. The cover will then cease.
3. Critical illness cover can usually be taken out on a decreasing or increasing cover basis and can often be combined with other cover, such as life cover.

Question 7

Income protection cover

Answer 7

Income protection insurance is designed to pay out an income benefit when a person is unable to work for a prolonged period due to sickness or incapacity. Since this may need to be paid for a significant period of time, the premiums are relatively expensive. Their use and value can be readily appreciated by considering how a family would continue to pay its bills if the main income earner were to fall ill

Question 8

What are some key features of Income Protection policies?

Answer 8

1. The circumstances under which a benefit will be payable are clearly defined. The illness or injury that an individual may suffer is referred to as ‘incapacity’, and the insurance policy will define what constitutes this in relation to their occupation.
2. The policy provides a regular income after a certain waiting period called the ‘deferred period’ (the longer the deferred period chosen, the lower the premiums will be). The income will generally
   represent 50–75% of your pre-tax earnings considering state benefits and the fact that the income from the policy is not subject to tax. Payments will differ or cease on return to work.
3. Once a claim is made, the insurance company may extend the deferred period or even decline the claim. The claim will not be met if incapacity arises as a result of specific situations including, for example, unreasonable failure to follow medical advice, alcohol or solvent abuse or intentional self inflicted injury

Question 9

Mortgage Payment Protection Cover

Answer 9

Mortgage payment protection is designed to ensure that the payments that are due for a mortgage continue to be paid if the borrower is unable to work because of accident, sickness or unemployment. They tend to be available from the lending institution, as well as insurance companies, although costs need to be carefully compared. They are designed to cover short-term problems, such as covering the costs if an individual loses their job and until they find alternative work, rather than long-term benefits.

Question 10

What are some key considerations about Mortgage Payment Protection?

Answer 10

1. The protection provided will be on a level basis, so regular reviews are needed so that the cover reflects the payments due as mortgage interest rates change.
2. The amount of benefit payable can be reduced to take account of income from other sources and there may be limits on the maximum amounts that will be paid. As a result, the amount of benefit paid may not cover the mortgage payments.

Question 11

Accident and Sickness Cover

Answer 11

Personal accident policies are generally taken out for annual periods and can provide for income or lump sum payments in the event of an accident. Although they are relatively inexpensive, care needs to be taken to look in detail at the exclusions and limits that apply. These may include:
* the amount of cover may be the lower of a set amount or a maximum percentage of the individual’s gross monthly salary, or
* the waiting period between when an individual becomes unable to work and when benefits start may be 30 or 60 days.
The insurance company will assess eligibility at the time of the claim and may refuse a claim as a result of pre-existing medical conditions even if they have been disclosed

Question 12

Key considerations about household covers

Answer 12

1. Is the cover enough to pay for the complete rebuild of a home?
2. To what extent are external features of a house covered, such as walls, gates, drives and pathways?
3. What cover is there in case a neighbor sues you for your tree falling on their property or a similar accident?
4. What is the extent of cover for personal possessions?
5. Is legal cover included?

Question 13

Medical Insurance

Answer 13

Private medical insurance is obviously intended to cover the cost of medical and hospital expenses. It may be taken out by individuals, or provided as part of an individual’s employment.
Some of the key features of such policies are:
* the costs that will be covered are usually closely defined
* there will be limits on what will be paid out per claim, or even over a period such as a year, or
* the standard care that can be dealt with by a person’s local doctor may not be included.
Again, there will be exclusions, eg, for pre-existing conditions

Question 14

Long-Term Care

Answer 14

The purpose of long-term care cover is to provide the funds that will be needed in later life to meet the cost of care. Simply considering the cost of nursing home care explains the need for such a policy, but its value to an individual will depend on the amount of state funding for care costs that will be available. Premiums will be expensive, reflecting the cost of care, and the benefit will normally be paid as an income that can be used to cover the expenditure.

Question 15

Business Insurance

Answer 15

Business insurance protection can take many forms and the two main types are liability insurance, such as public liability insurance, and indemnity insurance. Some examples of its use are:
* providing indemnity cover for claims against the business for faulty work or goods
* protecting loans that have been taken out and secured against an individual’s assets
* providing an income if the owner is unable to work and the business ceases
* providing payments in the event of a key member of a business dying, to cover any impact on its
profits, or
* providing money in the event of the death of a major shareholder or partner so that the remaining
shareholders can buy out their share and their estate can distribute the funds to their family

Question 16

Investing

Answer 16

Investing involves committing money into an investment vehicle, eg, a fund or a direct investment such as shares, in the hope of making a financial gain. It is different from saving because it involves a greater level of risk, and there is no guarantee that you will get your money back. Again, there is a wide range of investment products available, including individual accounts, unit trusts, shares and bonds

Question 17

Saving

Answer 17

If someone saves regularly, they will quickly find that their savings will add up and keep growing. This is because each time any interest earned on money is paid into an account, it will start earning interest too. This interest on interest is known as compound interest, and over the longer term, it makes a significant difference as to how much the savings are worth

Question 18

Estate Planning

Answer 18

Estate planning is concerned with making sure that a client takes appropriate steps to ensure that their accumulated wealth passes to their intended beneficiaries and in as tax-efficient a method as possible.It can be a complex subject, but essentially involves determining who is to inherit the assets of the client and what steps can be taken to reduce any estate taxes that will arise on the client’s death.A key first step in estate planning is to assess the extent of a client’s assets and liabilities. These include their property, savings and any investments, but it is also necessary to identify any other funds that would become payable if the client were to die, such as the proceeds of any life assurance policies or the payment of death benefits if the client is still working. The assessment of a client’s liabilities should also take account of any protection policies that may be in place to meet that liability, such as a mortgage protection policy.

Question 19

Tax Avoidance

Answer 19

Tax avoidance is, generally, the legal exploitation of the tax system to one’s own advantage to attempt to reduce the amount of tax that is payable by means that are within the law, while making a full disclosure of the material
information to the tax authorities.

Question 20

Tax evasion

Answer 20

By contrast, tax evasion is the general term for efforts by individuals, companies, trusts and other entities to evade the payment of taxes by illegal means

Question 21

Tax Mitigation

Answer 21

Used to refer to acceptable tax planning. It refers to minimizing tax liabilities in ways that are expressly endorsed by tax legislation. By contrast, tax avoidance flouts the spirit of the law and is, therefore, thought by some to be unacceptable, albeit not criminal in the way that evasion is.

Question 22

Worldwide System of taxation

Answer 22

Residents of that country are taxed on their worldwide income and capital gains irrespective of where the income or gains arise. For example, the US has a worldwide-based system of taxation as does the UK, Australia, Germany, Italy and Japan.

Question 23

Territorial-Based Taxation

Answer 23

Residents are taxed only on income and capital gains arising in that country, and income and gains arising outside of that country are not liable to tax. Some countries that adopt the territorial-based system, however, extend the tax base of residents to include overseas income and gains, but only if such income or gain is remitted to the country of
residence.

Question 24

Legal Persons and Capacity

Answer 24

A legal person is an individual or an entity that is recognised as having legal rights and obligations, such as having the ability to enter into contracts, to sue, and to be sued. Entities can take many forms, such as companies, partnerships and trusts.

Question 25

Individuals

Answer 25

Individuals acquire their status as legal persons when they are born, but their legal capacity to enter into contracts or otherwise exercise their rights is limited in certain circumstances.
A person who is of age and of sound mind has the legal capacity to make their own choices and decisions, and so they can enter into contracts providing that it is not illegal or void for reasons of public policy. The relevance of this for a financial services firm is that they can, for example, open accounts, enter into agreements and give instructions to trade with individuals they know are of age and of sound mind.
Where someone is underaged, however, the position is different. In the UK, individuals under 18 are known as minors and they are able to enter into a contract under law, however, the contract is binding on the adult, but it is voidable by the minor before they reach 18 and for a short time afterwards. This means that the minor can enforce the contract, but can also terminate it if they wish (subject to some
exceptions). Once the minor reaches the age of 18 and ratifies the contract in some way, it becomes legally binding on both parties.
This legal position does not mean that banks do not offer banking accounts to those under 18. It does mean, however, that they may put additional requirements in place to protect themselves, especially where accounts are opened for children under 16

Question 26

Ordinary Power of Attorney (OPA)

Answer 26

An ordinary power of attorney (OPA) or general power of attorney (in the US) authorizes one or more persons, known as attorneys, to make financial decisions on an individual’s behalf or to undertake specific actions. Individuals may use this for a number of reasons, for example, if they are out of the country and legal documents need to be executed, or if they are in hospital and unable temporarily to look after their financial affairs. It will usually end either at a specified time or upon the request of the donor at any time and it will automatically be revoked if the donor loses mental capacity. A bank or financial institution will need to check the document to confirm their authority to act and the attorney’s identity before accepting any instructions

Question 27

Lasting Power of Attorney (LPA)

Answer 27

If an individual wants someone to be able to act on their behalf should there come a time when they no longer have the mental capacity to make their own decisions, then they can execute a lasting power of attorney (LPA). This is also known as ‘durable power of attorney’ in the US.

Question 28

Trust

Answer 28

A trust is the legal means by which one person gives property to another person to look after on behalf of yet another individual or set of individuals. The person who creates the trust is known as the settlor. The person they give the property to, in order to look after on behalf of others, is called the trustee, and the individuals for whom it is intended are known as the beneficiaries. The terms of a trust are set out in a trust deed which will also appoint the trustees and give them powers to manage the trust and invest the assets. Assets are transferred into the trust and this involves the trustees becoming the legal owners of the assets although they continue to hold these on the terms of the trust and for the benefit of the beneficiaries. As the trustees are responsible for managing the trust and are the legal owners of its assets, they have the legal capacity to enter into contracts on behalf of the trust. A financial institution will, therefore, need to see the trust deed and check the document to confirm the trustees’ authority to act and confirm their identity before accepting any instructions

Question 29

Companies

Answer 29

A company is a legal entity formed to conduct business or other activities in the name of its members. Because it is incorporated, it has a legal personality distinct from those of its members. This gives shareholders ‘limited liability’, ie, where their liability is restricted to the amount of investment in the
company.
A company is, therefore, a separate entity from its shareholders. It is a legal person in its own right and it is quite separate from those who own it (the shareholders) and those who run it (the directors).
A company operates through its directors who are empowered to run it and enter into contracts on its behalf. A financial institution will, therefore, need to see the incorporation documents of the company
and satisfy itself that the person it is dealing with is a director or is authorized by the board of directors to act.

Question 30

Partnerships

Answer 30

A partnership exists when two or more persons commence in business together with a view to making a profit. Certain persons are unable to form partnerships, including charities and not-for-profit organizations (NPOs).
While there does not need to be any written agreement for a partnership to exist, there will normally be a partnership agreement that takes the form of a deed setting out the way in which the partnership will operate. The partners are at liberty to decide on the terms of their own relationship and may choose almost any conditions they wish as long as they are agreed to by all of the partners.

Question 31

What are the main 3 types of partnerships in the UK?

Answer 31

1. Conventional partnership – this is not a separate legal entity from its owners. Partners are responsible for their own and each other’s debts, and each partner can sue and be sued in their own name. A partnership is unable to hold land and property in its name and instead any contract is with the individuals forming the partnership.
2. Limited partnership – at least one partner must have unlimited liability, referred to as a general partner, while the others have limited liability.
3. Limited liability partnership (LLP) – this is a corporate version of a partnership. An LLP is a separate legal entity to its members (the partners) and so may hold land and property in its name. LLPs have designated partners who are the equivalent to company officers.

Question 32

Agency

Answer 32

The law of agency refers to a set of rules designed to ensure the smooth functioning of businesses by setting out the scope of the authority granted to an agent.
In a relationship between a principal and agent, the function of the agent is to create a contract between the principal and third parties or to act as the representative of the principal in other ways.

Question 33

Personal Property

Answer 33

Personal property includes possessions of any kind, as long as they are considered movable property and owned by someone. It includes tangible items, such as furniture and vehicles, and intangible items, such as bonds and shares.

Question 34

Real Property

Answer 34

Real property or immovable property is that property which is fixed permanently to one location. This includes land and anything that is built on it. It also includes anything that is growing on the land or that exists under it. Examples include land, buildings, crops and mineral rights.

Question 35

Joint Ownership

Answer 35

Where assets are held in joint names, the surviving joint owner takes the deceased’s share automatically.
The surviving joint owner needs to register the death certificate with the bank or other financial institutions. This should then transfer the asset into the sole name of the survivor

Question 36

Tenancy in common

Answer 36

This is where an asset is owned by one or more individuals who could own the asset in equal shares or potentially in unequal shares. This could be an asset such as land or simply a bank account that is held in this way for administrative convenience.
The major difference with tenancy in common is that if one of the owners dies, their share of the property does not automatically pass to the surviving owner; it would pass to whoever they specified in a will or, if a will is not made, in accordance with the rules of intestacy

Question 37

Insolvency

Answer 37

Insolvency is where the liabilities of a business or an individual (ie, what they owe) exceed their assets (ie, what they own), or where they are unable to repay their debts as they fall due. Insolvency is a term that is used to describe all types of financial failure (bankruptcy only applies to an individual, not a partnership entity or a limited company).

Question 38

Bankruptcy

Answer 38

Bankruptcy usually lasts for a year if the individual cooperates with the official receiver or their trustee
in bankruptcy. It is worth noting that, until you are made bankrupt, bailiffs can still call at your door to attempt to take goods

Question 39

Liquidation

Answer 39

A liquidation is the legal ending of a limited company. Following liquidation, a business will be removed from the official Companies House register – a process known as being ‘struck off’. From this point, that business ceases to legally exist. Both solvent and insolvent companies can be liquidated, however, the process for doing so differs slightly for each. A liquidator will sell a business’ assets, pay the firm’s creditors and distribute any remaining share capital to shareholders

Question 40

Administration

Answer 40

An insolvency practitioner or ‘administrator’ is appointed to take control of the company. The administrator will devise a plan to:
1. restore the company’s viability while coming to an arrangement with its creditors
2. realize the company’s assets to pay a particular creditor, or
3. sell the business as a going concern on the basis that more money can be made from its assets than if the firm was liquidated

Question 41

Scams

Answer 41

Scams are schemes to con people out of their money. They can be by post, telephone, text message, email or a scammer may simply turn up at someone’s home. Scams can affect many different types of people and anyone who thinks they have been the victim of a scam should report it. Reporting authorities vary by jurisdiction

Question 42

What are the 5 stages of financial Planning ?

Answer 42

1. Determine the client’s requirements.
2. Formulate the strategy to meet the client’s objectives.
3. Implement the strategy by selecting suitable products.
4. Revisit the recommended investments to ensure that they continue to meet the client’s needs.
5. Periodically revisit the client’s objectives and revise the strategy and products held, if needed.

Question 43

What are the main responsibilities of an adviser?

Answer 43

1. helping clients to decide on, and prioritize objectives
2. documenting the client’s investment objectives and risk tolerance
3. determining, and agreeing, an appropriate investment strategy
4. acting in the client’s best interest
5. where agreed, keeping the products under review, and
6. carrying out any necessary administration and accounting.

Question 44

Risk Assessment

Answer 44

1. Risk Tolerance: This is a personality characteristic best described as a client’s willingness to accept a certain level of fluctuation in the value of their investments
   without feeling an immediate desire to sell.
2. Attitude to Risk: This represents the client’s personal opinion on the risks associated with making an investment, based on their prior knowledge and experience.
3. Capacity for Loss: This is the client’s actual ability to absorb any financial losses that might arise from making a particular investment.