Investment Advicd Process

Question 1

Investment advice process (8)

Answer 1

• Establish and define relationship
• establish client goals
• Ethical considerations
• analyse clients financial position
• establish risk profile
• decide on asset allocation
• select funds and tax wrappers
• present and implement recommendations
• monitor/ review, making changes where necessary.

Question 2

What is the importance of asset allocation when constructing a portfolio (4)

Answer 2

• to provide diversification
• to reduce risk
• to match ATR
• maximise returns

Question 3

Why would strategic and tactical asset allocation be used in a portfolio? (6)

Answer 3

Strategic:

• to enable long term suitability
• to meet objectives / ATR

Tactical:

• short term
• active approach
• maximise opportunities
• adds alpha

Question 4

What factor would you consider when constructing a portfolio for a client? (6)

Answer 4

• objectives
• ATR
• cfl
• personal circumstances
• financial circumstances
• ethical beliefs
• investment timeframe
• tax status
• inflation assumptions

Question 5

Why include equities in portfolio for cautious investor with long timeframe (5)

Answer 5

• risk is time related, the more time the more risk and volatility is diluted
• client has long timeframe so short term fluctuations are less important
• client wants real returns above inflation
• equities are real assets
• and over long term have outperformed inflation

Question 6

How should asset allocation alter a few year from retirement (3)

Answer 6

• 5-10 years from retirement
• start to reduce equity exposure
• as major loss would be harder to recover
• she should then rely on more stable assets such as fixed interest investments
• which also provide a hedge against annuity rates and cash

Question 7

Why include equities in portfolio for cautious investor with long timeframe (5)

Answer 7

• risk is time related, the more time the more risk and volatility is diluted
• client has long timeframe so short term fluctuations are less important
• client wants real returns above inflation
• equities are real assets
• and over long term have outperformed inflation

Question 8

How should asset allocation alter a few year from retirement (3)

Answer 8

• 5-10 years from retirement
• start to reduce equity exposure
• as major loss would be harder to recover
• she should then rely on more stable assets such as fixed interest investments
• which also provide a hedge against annuity rates and cash

Question 9

Explain the main objectives of rebalancing (6)

Answer 9

• to realign a portfolio to its original asset allocation
• to match ATR
• and CFL
• to review the individual funds
• invest any cash
• and adjust the portfolio to meet changes in clients circumstances

Question 10

Identify 10 issues that a financial advisor should consider when rebalancing a portfolio that has been set up an is generating income (10)

Answer 10

• trading costs / cost of changing or switching funds
• whether to alter the benchmark
• potential tax liabilities of any changes
• regulatory issues
• is rebalancing automatic
• frequency of rebalancing
• whether existing income will be effected
• ability to be able to rebalance the existing products/ funds
• market timing is the rebalance
• ongoing suitability of the asset allocation