Investments Flashcards
List 8 considerations when assessing a clients capacity for loss
Income requirements
Investment timescale
Health status
Reliability of other income sources
Value of current assets
Availability of an emergency fund
Likelihood of future inheritance
ATR
Current investments
What are the 4 steps for the risk profiling process?
- Questionnaire
- Computer (input into software)
- Results
- Asset allocation model (clients score is used to produce an asset allocation model in line with the efficient frontier)
Give 4 elements of an OEIC
Is structured as a private limited company
The assets are held by an independent depositary
The OEIC is operated by a board of directors
There is an authorised corporate director who runs the OEIC day to day
One advantage and one disadvantage of Time Based Fees, Fixed One Off Fee and % of AUM Fee
Time based: Makes comparing advisers costs easy, but adviser may be inefficient and makes it harder to know the final bill.
Fixed one of fee: Total cost known at outset, but hard to know how the fee has been determined
% AUM fee: Adviser has incentive to grow the portfolio, but the fee doesn’t take into account the amount of time the adviser has taken on a clients account
What information will Alex need to provide to claim the additional permitted subscription (APS)?
Tanya’s:
Name
Address
NI number
DOB
DOD
Date of marriage
Confirmation they were living together
Remember it must be submitted within 3 years of Tanya’s death, OR 180 days after the completion of the administration of the estate, whichever is later
Outline the process you’d undertake to enable you to review the performance of Alex and Tanya’s ISA
Obtain LOA
Confirm date of purchase
Base cost
Identifying any reinvested income
Calculate the gain
Assess asset allocation
Identify and compare against suitable benchmark
Compare costs and charges
Review volatility
Compare to their ATR
Why might using a personal pension be a better vehicle for the children than saving into a JISA for Alex?
Receive 20% tax relief on conts
Pension is IHT free
Longer timescale so can use higher risk investments
No risk of kids squandering the money at 18
They can contribute beyond 18
What are 4 main drawbacks of using a lump sum rather than regular savings?
Risk of capital loss
Market timing risk
Loss of liquidity in larger tranches
No option for pound cost averaging to benefit from volatile investments
Two advantages and two disadvantages of passive funds
Advantages
Low cost
Good for investors who believe in EMH
Shouldn’t see volatile returns drastically different from the benchmark
Managed by algorithms who do not suffer from behavioural investing biases
Disadvantages
Tracking error caused by fund charges
Many don’t have active management
May underperform active alternatives over long term
Lack of alpha
Name 4 behavioural finance examples
Overconfidence
Prospect theory: when people put more weight on potential gains than potential losses
Anchoring: using irrelevant information as a basis to make an investment decision
Mental accounting: when people are naive to a potential change in income or expenditure patterns
Give 3 advantages and 3 disadvantages of DFM vs Advisory
DFM pro’s:
Can act quicker
Reduced admin for client
Investment decisions lie solely with qualified investment manager
DFM con’s:
Client has no say in any investment decisions
Usually an extra layer of costs
Advisory clients have greater level of engagement
Benefits of Alex to use a platform for his portfolio of investments (6)
Ease of administration for Alex, given his reduction in time availability
Consolidate all investments under one roof
Benefit from automatic rebalancing
Benefit from 24/7 online access
Cheaper than investing directly with fund manager
Access to cheaper share classes
Access to both acc and inc share classes
Access to a range of DFM’s
Access to portfolio tools and cash flow modelling
Can receive consolidate tax vouchers
What is Alex’s current dividend allowance, and next years dividend allowance?
£1,000 for 23/24 but will half to £500 in 24/25. His dividend allowance will be used up from the £2,450 he will receive from the unit trust.
Until the unit trust is transferred to Alex, who is responsible for paying the dividend taxation?
The personal representatives of the estate are responsible, which will be at 8.75% with NO DA available
Briefly explain how the CGT bill will be calculated if Alex sells the unit trust once it has passed to him
The base cost will be £70,000, as any gain during Tanya’s life has effectively been wiped out
He would be able to add the total value of all reinvested income since the transfer
Then simply deduct this total from the sale value to get the capital gain
Any gain above his £6,000 CGT exemption will be taxed at 20%
Though he could register losses from previous tax years to offset this gain, if he has any losses available
Remember that next years CGT allowance halved to only £3,000
