lecture 2 Flashcards
When is financial advice provided?
o A recommendation, statement of opinion, a report of a recommendation or statement of opinion
o Is provided with the intention to influence a person in deciding in relation to a financial product or group of financial products
o Intending to change behavior towards something
Personal advice vs general advice
o General advice: know the product but not the client, giving your opinion on the product
o Adviser did not consider any of the objectives, financial situation and needs of the person
Personal advice is provided when:
o Adviser explicitly offered to provide advice
o Existing financial relationship
o Requested personal advice by client
o Adviser requested details about the client’s personal circumstances
o Adviser received info about client’s personal circumstances
Financial planning processes and procedures
o Initial Interview
Gather info
Establish goals and objectives
Analyse data and issues
o Follow up interview
Develop SOA
Implement a plan
o Ongoing interviews
Review and revise the plan
Data collection
o Allows us to understand client’s needs and to know the client
o Collected through fact finder
o What can go wrong? Cash flow problems
Goals and objectives
o All financial plans are different
o Some goals are unachievable
o Goals vary from client to client, but certain age groups have similar types of goals
Identify issues and analyse circumstances
o Analyse financial circumstances of the client
o Analyse the risk profile of the client
o Identify issues and problems with the client’s existing strategy
o Balance sheet and cash flow statement
Cash flows: salary, income, pensions
Outflows: living expenses, taxation, asset purchases
Surplus or deficit
Net worth
o Net worth/total assets * 100
o They own ^% of assets, and other own the rest
Liquidity ratio
o Liquid assets / current liabilities * 100
o Show percentage of assets available to cover current debt
Basic liquidity ratio
o Liquid assets / monthly expenses * 100
o Shows the number of months in which expenses can be covered with no income
Savings ratio
o Surplus / disposable income * 100
o Look at lifestyle creep, as you earn more you spend more
o Unlikely you can maintain this lifestyle, managing spending
Debt ratio
o Total debt / disposable income * 100
o Too high? When is there too much debt?
Analysing a client’s risk profile
o Assessing the client’s risk profile -> designed around their risk and return philosophy
o Pick between different portfolios based on their risk profile
SOA
o Provided for limited advice, and comprehensive advice
o ROA can be provided when
SOA been previously provided with client circumstances
Relevant circumstances have not changed significantly
Relevant basis has not changed significantly
o Primary documentation of advice
o Must contain sufficient information to enable people to make an informed decision
Advice is appropriate
Should act on it
o Provided at same time after the advice is provided
o Documents and appropriateness of advice
