Investments Topic 14 - Advice Flashcards
Robo-advice
an initiative designed to give advice to consumers who do not have enough money to pay the advice fee
Factors to consider when providing advice to customers
- Reviews
- Risk
- Objectives
- Current & future circumstances
- Amount
- Timescale
- Diversification & balance
- Asset allocation
- Tax position
- Ethical attitude
Client AtoR categories
- No risk/risk averse
- Low risk/cautious
- Medium risk/balanced
- Medium to high risk
- High risk/adventurous/speculative
Factors to consider when assessing capacity to loss:
- Existing debts
- Future capital needs/objectives
- Age – if they are near retirement, capacity for loss is less as they have less time to recover
When establishing a clients AtoR, you must ensure they make an informed decision. You must explain the general types of risk, which are
- Risk to capital
- Risk to income produced
- Different risks for different investments
- The effect of time on an investment
- Risk of not achieving the objective
- Risk involved with single investments compared to pooled
Different ways to establish a clients AtoR:
- Interview approach – adviser asks a number of questions
- Menu approach – adviser describes risk categories and client chooses where they fit in
- The psychometric approach – use of tools to assess the clients psychological AtoR rather than their objective ability to cope with a financial loss.
- Portfolio approach – adviser shows clients several portfolios all with different risk categories and the client chooses which one would suit them best. Off of this, the adviser can determine asset allocation and a general AtoR
Key questions for consideration of the clients current and future objectives
- Has the adviser established a full picture of the client’s circumstances – how much/how long are they investing and does the money need to stay liquid etc.
- Can the client reduce their outgoings or will they increase, leaving more/less money for investment
- Are the clients current investments achieving their objectives
- Are the clients investments tax efficient
- Are the clients investments flexible enough to account for future changes
- Would the client be better off repaying debts than investing
Switching investments is a tricky topic and the FCA require a fully reasonable explanation with proof as to why investments should be switched. Valid reasons for switching investments are
- Changes to client’s circumstances or objectives can lead to a rethink of their money
- May be wise to bank profits and rethink strategy
- May need to rebalance the asset allocation to accommodate the AtoR
- If an existing investment has failed to meet targets
- Market or economic conditions may lead to the need for change
Socially responsible investment (SRI)
covers a range of approaches to ensure that company policies and fund policies/investments match the ethical needs of clients
Negative screening
excluding companies off a list of allowable shares or bonds that the fund manager can invest in because of a company’s involvement in certain activities e.g. alcohol productions and sales, animal testing, human rights violation etc. Unethical things
Positive screening
including companies in the list of investments that a manager can invest in due to ethical activities e.g. community involvement, environmental management, packaging reduction etc.
These days, ethical investments are available in a number of asset classes such as
- Cash savings
- Corporate bonds
- Commercial property
- UK and overseas equities
Where SRI funds are unavailable, the next best thing is choosing a
fund provider with a good track record of responsible share ownership/management. This is also good for all investors, as this image is now so important that it can devalue share prices in the funds/companies
Vigeo Eiris
setup by a group of charities and churches to provide information and research/screens companies worldwide in relation to their ethical stance but does not provide advice.
UK Sustainable Investment and Finance (UKSIF)
main purpose is to promote and encourage development and positive impact of SRI to UK-based investors. Members include retail and institutional fund managers, banks, trade unions, building societies and more
