Investment Process & wrappers Flashcards

1
Q

What does capacity for loss mean?

A

The ability to withstand any negative investment event.

Adverse effect on standard of living

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2
Q

What non financial factors affect attitude to risk?

A

Previous experiences

Time horizon/age/health state/dependents

Client objectives/ethical/religious views

Investor psychology/perception

Framing

Society/collective mood/political/economic environment

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3
Q

Benefits and drawbacks of using an ISA long term compared to pension?

A

Benefits:

Accessible at any time/before age 55
Tax free on any withdrawals/income
Not subject to earnings/annual allowance
Not subject to LTA

Drawbacks:

No tax relief
Lower investment limit
Part of estate/can’t write under trust
Funds not earmarked for retirement/temptation to access early

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4
Q

Why use DFM?

A
Active management/ alpha
Wider range of assets/funds
Time markets/hold cash/speed of transactions 
Bespoke
Influence asset allocation
Tax planning service
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5
Q

Potential risks of using DFM?

A
FSCS limit exceeded/not available
DFM could use unsuitable assets 
Duplication with another portfolio
DFM acts outside mandate/deviation from benchmark
Regulatory issues
Overtrading/higher cost
Service may incur tax liability
Underperformance/negative alpha/does not add value
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6
Q

What are the ISA limits:
Adult
Junior
LISA

A

Adult £20,000
Junior: £9,000 (can have adult and junior at 16)
LISA: £4,000 (not in addition to the adult allowance - age 18-39)

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7
Q

What is the LISA bonus?

A

25% bonus (max £1,000 annually) paid until 50

On capital only

25% penalty bonus if not used for 1st home or retirement

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8
Q

What is risk tolerance?

A

Clients willingness to tolerate a certain level of fall in value of investments - no immediate need to sell

Timescales/other assets/age/stage of life etc.

Degree of uncertainty a client can cope with

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9
Q

What is risk perception?

A

Subjective - personal opinion

Based on knowledge and experience

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10
Q

What is risk capacity?

A

Ability to absorb losses - negative financial events

Largely objective

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11
Q

What is SAA & TAA?

A

SAA
Long term view
Regular rebalancing
Adjusted only in exceptional circumstances/client change in circumstance

TAA
Short term variations
Moves away from asset allocation for tactical reasons, also includes moves away from allocations within asset class
Take advantage of market movements
Judgement call by managers
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12
Q

What is positive and negative screening?

A

Positive - Invest in companies with positive approach/ responsible

Negative - Not investing in companies that do not meet clients ethical criteria/values e.g. tobacco, alcohol

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13
Q

Benefits of a platform?

A
Reduced admin
Reduced paper and online access
Wide range of authorised fund available
Share dealing account
Consolidated statements/tax reports
Agreed charge by client - not rebates
Availability of wrappers
Asset allocation across wrappers
Income flexibility
Prefunding
Access to tools
Discounted fund charges
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14
Q

Different Bottom Up approaches/Styles?

A

Contrarianism - Going against the trend to try and achieve higher returns - market sentiment tends to exaggerate prices

Growth at Reasonable Price - Companies with sustainable advantages over long term - significant growth potential

Value - Shares perceived to be undervalued - low price relative to market - low P/E - increase over time

Momentum - Takes advantage of trends in prices believing prices will continue in same direction due to momentum - sell when believes peaked - lost momentum

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15
Q

What is the best of sector approach?

A

Include all required sectors but select companies with best ESG record within each sector

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16
Q

Top down approach?

A

Determine asset allocation

Determine geographical distribution

Sector weightings

Choose stocks

17
Q

Drawbacks of a platform?

A

May pay exit charge

Pay for services not used

Unnecessary functionality/complex

Risk of platform failure/outage

Can it hold any specialist investments client wants

If transferring from individually held:

Time out of market

May have to sell

18
Q

What is ESG?

A

Additional investment analysis for ethical portfolios

Investment style of its own - emphasis on assessing businesses exposure to risk

Risk could be practical, financial or reputational

19
Q

What does each part of ESG stand for and mean?

A

Environmental: Impact business operations have on the environment - direct operations and supply chain

Social: Impacts people/society as a whole - human rights, employment practices, health, welfare and diversity

Governance: Business management practices - transparency - ongoing monitoring of the effectiveness and remuneration of senior management

20
Q

Sequencing risk

A

Effect of volatility on the order and timing/frequency of withdrawals and sustainability of income and impact on capital value.

Effect greater in early years

21
Q

Types of Ethical investment

A
Positive screening
Negative screening
CSR/SRI/Sharia finance/responsible
ESG
Impact
22
Q

What is ESG?

A

Additional investment analysis for ethical portfolios

Investment style of its own - emphasis on assessing businesses exposure to risk

Risk could be practical, financial or reputational