Learning Outcome 7 - 11 standard questions / Apply the investment advice process

Question 1

Which FCA sourcebook states that “firms must take reasonable
steps to make sure any recommendations provided to clients are suitable”?

Answer 1

FCA Conduct of Business (COBS)

Question 2

What is the difference between real returns and nominal returns?

Answer 2

Real = post-inflation
Nominal = does not consider inflation

Question 3

If the adviser considers the client’s expressed goals to be unrealistic, what should they do?

Answer 3

Try and negotiate a more realistic outcome

Question 4

Is Attitude to Risk subjective or objective?

Answer 4

Subjective

Question 5

Is the client’s capacity for loss subjective or objective?

Answer 5

Objective

Question 6

What are the 3 components that make up the clients risk profile?

Answer 6

1. Attitude to Risk
2. Tolerance of Risk
3. Capacity for Loss

Question 7

What is an Impact investment?

Answer 7

An investment focused on social or environmental outcomes as well as financial

Question 8

Sharia investments are compliant in which religion?

Answer 8

Islam

Question 9

List 5 constraints that will have an impact on an investor’s ability to tolerate risk.

Answer 9

1. time horizon
2. liquidity
3. tax
4. legal and regulatory factors
5. unique needs and preferences

Question 10

Diversification can be achieved through asset allocation and also…

Answer 10

Choice of fund managers using different styles and methods

Question 11

Significant variations to asset allocations tend only to be applied to which type of portfolios?

Answer 11

Growth

Question 12

This ‘investment objective’ is generally for risk-averse investors who want to minimise the risk of loss, usually in real terms. This means they want to achieve a return that is equal to or above the inflation rate. What is the investment objective?

Answer 12

Capital preservation

Question 13

This ‘investment objective’ is usually for longer-term investors where growth in the value of the assets in real terms is the priority, perhaps to build a retirement fund. Under this strategy, growth usually comes from capital gains. What is the investment objective?

Answer 13

Capital appreciation

Question 14

This ‘investment objective’ is often for investors who are focusing on income rather than capital gains. Perhaps income from the portfolio is needed to pay for living expenses. What is the investment objective?

Answer 14

Current income

Question 15

This ‘investment objective’ is usually for long-term investors who are looking for growth in the value of a portfolio to come from both capital gains and reinvestment of income. What is the investment objective?

Answer 15

Total return

Question 16

What are the 4 main types of investment objective?

Answer 16

1. Capital preservation
2. Capital appreciation
3. Current income
4. Total return