Generic Questions Flashcards
Outline the potential benefits of receiving and acting upon advice from a qualified financial adviser?
• Financial problems, goals and priorities will be identified.
• Benefit from adviser’s research.
• Help with budgeting/cash flow.
• Assessment of suitability of existing arrangements.
• Tax planning, use of tax wrappers or tax efficiency.
• ATR and CFL.
• Receive recommendations/create a financial plan.
• Dealing with professional/ knowledge/clarity of explanation.
• Ongoing service/reviews.
• Consumer protection/regulated advice.
Explain the process a financial adviser should follow to establish a client’s aims and objectives.
• Recognise needs and objectives.
• Help clients understand general aims and specific objectives.
• Ask open and closed questions/obtain hard and soft facts.
• Ensure objectives are SMART.
• Identify which are short-term/long-term/emphasis importance of long-term needs.
• Establish views on family/dependants.
• Establish timescales.
• Quantify and qualify objectives.
• Prioritisation/different views/not feasible to achieve all goals.
Explain what should be set out in an investment policy statement.
• The purpose of the investments.
• The income or growth objectives.
• The timescale.
• A statement about the client’s risk profile(s).
A statement about asset allocation.
• Other issues such as ethical investment.
Explain how lifetime cash flow projections/modelling is used.
• Used to forecast clients’ income and expenditure profiles over the long term.
• They provide a year-by-year summary of cash paid to and paid out by the client.
• Will show the years where there will be a surplus or a deficit.
• The main variables are:
- The level of income and capital inputs/level of expenditure.
- Assumptions about increases in income, capital values, spending and inflation.
- Projections can then be amended to include the effect of recommendations.
Outline the key information that should be taken into account by a financial adviser when building a lifetime cashflow model.
• Current income needs/future income needs.
• Planned capital expenditure/any further inheritances.
• Current assets/current income/level of guaranteed income (State pension).
• Growth rate assumptions/interest rate assumptions/charges.
• Inflation assumptions.
• ATR/CFL.
• Longevity/health.
• Market corrections/estimates of market falls/stress test.
• Impact of death of either client.
Explain the limitations of cashflow modelling and why they should not rely on this as the sole method of planning future income needs.
• Provides estimates only/snapshot of current situation.
• Inflation assumptions can be incorrect.
• Growth assumptions may not be achieved/Investment returns not guaranteed.
• Personal circumstances can change/ill health/loss of income/objectives can change.
• Tax rules may change.
• ATR/CFL may change.
• Charges/fees can change.
• Regular reviews required/needs to be updated regularly.
• Input errors/misunderstanding of information by client or adviser.
Outline the process a financial adviser should follow to provide clients with suitable advice on their existing investments.
• Disclose status/fee/client agreement.
• Fact-finding/goals/objectives.
• ATR/CFL.
• Analysis of the client’s situation/affordability.
• Undertake research.
• Formulate recommendation/develop plan.
• Make a presentation/recommendation to client.
• Implement/suitability letter.
• Annual review/monitor.
Outline the factors an adviser should consider and the process they should follow when recommending a fund switch.
• Fact-finding/knowing your client/client agreement.
• Assess ATR/CFL.
• Timescale.
• Charges.
• Performance.
• Fund choice available.
• Asset allocation/diversification.
• Select fund to match ATR.
• Present client with documentation.
• Obtain client permission/implement.
• Suitability Letter/recommendation letter to client.
Outline the process you would follow to enable you to review the performance of an existing investment.
• Letter of authority/obtain plan details.
• Confirm date of purchase.
• Base cost/any further investments/withdrawals/fund switches.
• Identify reinvested income.
• Calculate gain/performance history.
• Assess asset allocation.
• Identify suitable benchmark.
• Identify Alpha/compare against benchmark.
• Review charges.
• Comparison with risk-free return/risk adjusted return.
• Review volatility/risk rating of fund.
• Assess funds against ATR/CFL.
Explain what is meant by the term ‘risk profile?
• The level of fluctuation/volatility that clients are prepared to accept in their investment/pension portfolio.
• Holding investments that are higher risk than their risk profile may result in unacceptable losses in poor market conditions.
• If investments are lower risk than they are prepared to accept they may miss out on higher returns.
Why should an adviser not rely solely on a computer-based risk profiling tool to confirm a client’s ATR?
• Different results for each client would require further discussion.
•Different programmes produce different results.
• Potential for them to misinterpret/misunderstand question.
• Clients may not be able to relate to content of questionnaire.
• Will be unsuitable if they have a zero CFL.
• Different risk may be in evidence for different objectives/timescales.
Describe the steps that a financial adviser would follow to ascertain attitude to risk.
• Clients complete risk profile questionnaire.
• This focuses on timescales/priorities/responses to circumstances.
• Generates risk score.
• Score provides further discussion/used to produce asset allocation.
• Ascertain CFL.
• Adviser and clients agree suitable risk profile.
What does an adviser need to take into account when undertaking a risk assessment?
Risk tolerance
• Willingness to accept a certain level of fluctuation in investments.
Risk perception
• Personal opinion on the risks associated with making an investment - based on prior knowledge and experience.
Risk capacity
• The actual ability to absorb any financial loss.
• Risk tolerance may be affected by objective measures such as:
- Timescale.
- Family commitments.
- Wealth.
- Stage of life/age.
• Subjective measures include level of knowledge and previous experience with risk.
Explain the importance of reviewing attitudes to risk on a regular basis.
• ATR differs for different objectives.
• Changes based on investment experience/knowledge.
• Changes based on personal circumstances/health.
• Changes based on income/any recent inheritance.
• Fund performance/market performance/ensure investments match ATR.
• CFL.
Explain how a Whole of Life policy can be used to cover current and future
Inheritance Tax liabilities.
• In trust.
• Benefit outside of the estate/no probate/paid quickly.
• Premiums classed as being out of normal expenditure.
• Sum assured set to meet current IHT liability.
• Guaranteed insurability options to keep pace with value of IHT liabilities/inflation.
Class 3 NICs
• Voluntary contributions.
• Paid if someone has an inadequate NIC record.
• Allowing them to increase entitlement to the new State pension (or BSP where they had reached SPA before 6.4.2016).
• They should be paid within 6 years of the tax year in which the shortfall occurred.
• Payment can be made even if reached SPA but only in respect of a contribution shortfall that occurred prior to SPA.
Describe the process an adviser could use to ensure there are sufficient funds under an existing pension plan to provide the required level of target benefits.
• Establish the income required, allowing for inflation.
• Calculate the fund required based on assumed/agreed annuity rate.
• Allow for pension commencement lump sum requirement.
• Calculate existing benefits using assumed or agreed growth rate.
• Include ongoing funding.
• Calculate the shortfall and the increased contributions required.
• Ongoing reviews needed.
Explain how a purchased life annuity can provide additional income in retirement.
• Use PCLS or savings to pay a lump sum to an insurance company.
• This is irrevocable/inflexible.
• Annuity rate agreed for lifetime/fixed term/underwriting required.
• Income paid as a mix of return of capital and income.
• Return of capital is tax free.
• Income element is taxable as savings income.
• Can use personal savings allowance.
• Basic rate Income Tax is deducted at source by insurance company.
• Escalation is available.
• Joint life available.
• Capital guarantee available.
What is the safe withdrawal rate?
• A strategy to establish how much can be withdrawn to ensure that the fund doesn’t run out.
• Rule of thumb to use 30-year time period and a safe withdrawal rate of 4%.
• These figures are sensitive to asset allocation.
• Rate should be adapted to ATR.
What is stress testing?
• How a portfolio might perform in a downturn.
• Could client cope if capital ran out completely?
• Could they manage on a lower• income during a downturn/ensure capital is not too depleted?
Benefits and drawbacks of Phased Annuity Purchase
• Can choose how much to crystallise to achieve required income
• Income in early years is mostly PCLS so tax efficient.
• Annuity provides lifetime guaranteed income .
• Include options such as widow’s benefits, annuity protection etc.
• Flexible annuity option can be used to decrease income if required.
• Uncrystallised funds can continue to grow/potential investment growth.
• Any remaining uncrystallised funds available for beneficiaries.
• Tax free if death before
75/IHT free.
Benefits and drawbacks of phased FAD
• Can choose how much to crystallise to achieve required income.
• Tax-efficient income and total control over level of taxable income taken.
• 25% PCLS/75% to FAD
• The remainder of fund can remain invested.
• Remaining funds invested to suit ATR
• Potential investment growth.
Decision about what to do with remaining funds can be deferred.
• Not locking into an annuity/poor annuity rates/rates may improve.
• Tax free death benefits if death before 75/free of IHT/flexibility of beneficiary.
Benefits and drawbacks of UFPLUS
• Can access as much of pension fund as income needs require.
• Up to 25% tax free/excess taxed as pension income.
• Tax-efficient income
• Remainder of fund can remain invested.
• Remaining funds invested to suit ATR
• Potential investment growth.
• Decision about what to do with remaining funds can be deferred.
• Not locking into an annuity/poor annuity rates/rates may improve.
Simple to understand
• Useful for tax planning.
• Tax free death benefits if death before 75/free IHT/flexibility of beneficiary.
State why a client might consider using Junior ISAs to provide funds for their grandchildren/children’s future.
• Tax efficient.
• Held in children’s names/does not use parents/grandparents ISA allowance/anyone can contribute.
• Wide range of funds/cash/stocks and shares.
• Potential for growth.
• Flexible/can vary contributions/pound cost averaging.
• Children can choose funds from 16.
• Children get access at 18.
• Loss of control for grandparents/must be set up by parents/guardians.
• Investment risk/inflation risk.
• Charges/need for advice.
What are advantages of having valid Wills?
• Provides clear instructions as to how the estate is to be distributed.
• Can choose the people that will be responsible for administering the estate.
• Avoids the intestacy rules.
• Can make specific provision for the guardianship of children.
Explain the key duties of an executor of a Will.
• Administer deceased’s affairs/ obtain most up to date copy of Will.
• Obtain full details of all assets/liabilities/settle debts.
• Complete IHT return/pay IHT.
• Obtain/apply for probate.
• Distribute estate in accordance with Will/inform beneficiaries of entitlements.
• Complete Income Tax/CGT return.
• Prepare estate accounts.
Identify the key instructions that should be included in a Will
• Identify beneficiaries.
• Identify split of estate.
• Specific gifts/charitable donations.
• Identify suitable executors.
• Residuary beneficiaries in event of death of main beneficiaries.
• Funeral requirements.
• Need for trusts/identification of trustees in event of gifts to grandchildren/any restrictions on gifts.
Explain why Wills should be reviewed regularly.
• Ensure executors/trustees in place and able to act.
• Considers change in family circumstances/divorce/can change beneficiaries/grandchildren/ensure wishes are reflected.
• Financial position may change.
• IT planning/changes in legislation.
