Investment Advice Process

Question 1

What is short, medium and long term?

Answer 1

• short term = up to 5 years,
• medium term = between 5-10 years,
• long term = >10 years

Question 2

Do investment advisors have to include questions on responsible, sustainable and ethical investing in the fact find?

Answer 2

• New MiFID II rules came into effect in the EU in 2021 whereby advisers must include questions on responsible, sustainable and ethical investing in the fact find.
• As this date is after the end of the UK’s transition period with the EU, this rule DOES NOT APPLY IN THE UK as yet

Question 3

What are the 4 drivers of client vulnerability?

Answer 3

1. Health
2. Resilience – (eg, low or erratic income, low savings, low emotional resilience and/or high levels of debt)
3. Life events – a change in the individual’s circumstances such as divorce, bereavement and redundancy could impact a client’s ability to make decisions,
4. Capacity – a client who is illiterate, has learning difficulties and/or neurodevelopmental disorders may be vulnerable.

Question 4

How should advisors deal with vulnerable clients?

Type of advice, who should be there, records

Answer 4

• Provide tailored and suitable advice in a format that the client can access and understand
• Discuss having a trusted family member/friend present at meetings
• Ensure there is appropriate authority on file before discussing matters with a third person. For example, a power of attorney (POA)
• Document matters and refer to their compliance/financial crime department,
• Ensure that partially sighted clients, or those with hearing difficulties, are aided and supported.

Question 5

Can advisors recommend UCISs and complex products to clients?

Answer 5

• the promotion of UCIS and similar complex investments – collectively known as nonmainstream pooled investments (NMPIs) – to retail investors in the UK has been banned to reduce the risk of consumer harm
• IFAs can still consider investing in UCIS for their clients, they must have undertaken thorough due diligence on the suitability of the UCIS and the wrapper that it is in

Question 6

What is tax loss harvesting?

Answer 6

• selling securities at a loss to offset gains in others, thus reducing the client’s CGT tax bill

Question 7

What are the 6 outcomes of the Fair Treatment of Customers initiative?

Answer 7

• 1 – consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.
• 2 – products and services that are marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.
• 3 – consumers are provided clear information and are kept appropriately informed before, during and after the point of sale.
• 4 – if consumers receive advice, the advice is suitable and takes account of their circumstances.
• 5 – consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.
• 6 – consumers are not subjected to unreasonable post-sale barriers imposed by firms in order to change products, switch providers, submit a claim or file a complaint.

Question 8

Who is the consumer duty for?

Answer 8

• Retail Clients
• Other clients -FTOC still applies

Question 9

When does an advisor need to make the customer aware of costs?

what form?

Answer 9

• In writing and before it conducts any business.
• It must also disclose any product-related charges and any commissions it may receive from a product provider.

Question 10

How much do advisers typically charge clients?

Answer 10

• Initial adviser charge = 1% and 5%. (average 2-3%)
• Ongoing adviser charge = 0.5% to 2.0% (average 1%)

Question 11

IS VAT due on adviser charges?

Answer 11

VAT may be payable on adviser charges depending on the service provided.

Question 12

What is the difference between investment and speculation?

Answer 12

**Time Frame **

• Investment - over a longer time frame.(medium to long term)
• Speculation - a shorter time frame & limited/no knowledge about risks

Question 13

What is shortfall risk?

Answer 13

The risk associated with an investor not reaching their intended investment target

Question 14

What is greenhushing?

Answer 14

deliberately hiding or choosing to under-report their green credentials from public view, for fear of being penalised for not addressing those issues or for addressing them too late,

Question 15

What is Ijara?

Answer 15

a leasing agreement

Question 16

What is Ijara-wa-Iqtina?

Answer 16

a leasing agreement where the customer can buy the item at the end

Question 17

What is Mudaraba?

Answer 17

offers specialist investment by a financial expert in which the bank and the customer share any profits

Question 18

What is Murabaha?

Answer 18

a form of credit that enables customers to make a purchase without having to take out an interest-bearing loan

Question 19

What is Murasharaka?

Answer 19

an investment partnership in which profit-sharing terms are agreed in advance, and losses are pegged to the amount invested

“sh” = share

Question 20

What are common investment funds (CIFs) and charity investment funds (CAIFs)?

What type of vehicle & regulation

Answer 20

• CIFs and CAIFs are both pooled investment vehicles that have been specifically set up for charities
• CIFs are regulated by the Charity Commission (which registers and regulates charities in England and Wales), they are not regulated by the FCA

Question 21

What are mixed motive investments for charities?

Answer 21

When a charity’s investment cannot be wholly justified by either:

1. Generating the best possible return for an acceptable level of risk,
2. Furthering the charity’s objectives but maybe not delivering a market-rate financial return.

Question 22

What is sequencing risk?

Answer 22

the risk that the timing of withdrawals from a portfolio will have a negative impact on the overall rate of return available to an investor

Question 23

On average how often should portfolios be rebalanced?

Answer 23

Every year

Question 24

What sort of language should be used when liaising with customers?

2 points

Answer 24

• The language in the report should be as concise and clear as possible.
• The language used should not include jargon, except when necessary to explain points being made.

Question 25

What is the minimum cooling off period in the UK?

Answer 25

14 days

Question 26

What are the maximum FOS rewards?

Before and after 2019

Answer 26

1) Issues occuring on or after 1 April 2019 = £430,000

2) Before 1 April 2019 = £195,000

Question 27

What basic properties should a benchmark possess?

SUMIA

Answer 27

• Specified in advance – the benchmark is specified in the IPS at the start of the investment process and is known to all parties.
• Unambiguous – the identities and weights are clearly defined.
• Measurable – the returns and risk of this portfolio can be calculated quickly and frequently,
• Investable – it is possible to forego active management and hold this benchmark as a passively managed portfolio.
• Appropriate – the benchmark is consistent with the manager’s investment style or area of expertise.

Question 28

Difference between LIGHT and DARK green funds?

Answer 28

DARK GREEN - select investments to exclude those areas that do harm to people, animals or the environment i.e. negative screening

LIGHT GREEN - Engaging with companies to try to bring about more ethical practice.

Question 29

Trustees requirements when investing for charities?

Answer 29

• Obtain suitable advice - unless they possess the appropriate skills and knowledge
• Consider the suitability of any investment for the needs of the charity
• Consider the need for diversification
• Periodically review

Question 30

What info is needed to build up an IPS?

Answer 30

• Objectives – return requirements and risk tolerance.
• Constraints – liquidity, time-horizon, regulations, taxes and unique needs.

Question 31

What are the 3 cross cutting rules?

How can firms deliver good customer outcomes?

Answer 31

1. Act in good faith toward retail customers
2. Avoid foreseeable harm to retail customers
3. Enable and support retail customers to pursue their financial objectives

Question 32

When should a composite benchmark be calculated and used?

Answer 32

When a single benchmark is not good enough for comparison to a portfolio

Question 33

Whats the difference between SRI and ESG?

Answer 33

SRI is driven first by investors’ individual values rather than investment potential

Question 34

When are power from the trustee act 2000 not applicable?

Answer 34

• the charity is a charitable company (except when the company is itself acting as a charity trustee), or
• the charity’s governing document excludes or restricts the Trustee Act 2000 power

Question 34

What should a charity do if the trustee act powers are not applicable?

Answer 34

the trustees must rely on any powers within their governing document when making investments

Question 35

What are offset mortgages?

Answer 35

allow the net outstanding borrowing to be set against cash balances

Question 36

How is the portfolio turnover rate calculated? and what % is condisered low?

Answer 36

• dividing the total amount of purchases or sales (whichever is less) over the period, by the NAV of the portfolio
• A PTR of 20–30% is considered to be low

Question 37

What is the absolute minimum cooling off period?

Answer 37

14 days