Mixed (Non Case Study) Exam Questions Flashcards
State the process that a financial adviser should follow when providing (8) appropriate financial advice.
Establish/define relationship/confirm scope of service/fees.
Fact-find/obtain goals and objectives/confirm capacity for loss/attitude
to risk.
Analyse current situation/existing investments/identify shortfalls.
Develop financial plan/research.
Present financial plan/recommendation/discuss.
Provide Key Information Documents (KID)/suitability report.
Implement plan/obtain client agreement.
Monitor/review
Identify the factors that would typically influence a client’s tolerance for risk.
Timescale
Age
Health
Level of disposable income / emergency fund / wealth
Degree to which income is secure
Investment experience
Financial objectives
Current market conditions
Capacity for loss
Outline the factors an adviser should consider and the process they should follow when recommending a fund switch. (10)
Fact-finding/know your client/client agreement
Assess ATR/capacity for loss
Timescale
Charges
Performance
Fund choice
Ethical preferences
Asset allocation/diversification
Select fund/portfolio to match risk
Present KIID
Obtain client permission/implement
Suitability letter
What are the benefits to a client of receiving and acting upon advice from an (10) authorised financial adviser?
Their financial problems, goals and priorities will be identified.
They will benefit from adviser’s research
The adviser can help with budgeting/cashflow modelling in particular
where income is tight
Adviser can assist in assessing suitability of existing arrangements
including those that have been inherited (if applicable)
Assist in tax planning, use of tax wrappers for tax efficiency
Complete a current assessment of the client’s attitude to risk (ATR)
and capacity for loss
The client will receive recommendations to meet their personal
circumstances.
Clear explanation of how recommendations meet their needs and
personal circumstances
Ongoing service/reviews are beneficial as client’s circumstances
change over the years (self-employment / employment)
They will have a higher consumer protection by receiving advice than
making own decisions
State seven key benefits for of receiving ongoing financial advice.
Identify targets / objectives
Analyse existing arrangements / identify shortfalls
Ensure tax allowances are used
Assess budget / affordability/ cashflow
Assess ATR / capacity for loss
Identify new products / respond to new rules
Review performance of investments
Explain the difference between capacity for loss and attitude to risk. (2)
Capacity for loss - an individual’s financial ability to absorb losses should they occur
Attitude to risk is the amount of risk an individual is willing to take - where they are comfortable investing their funds and how prepared they are to see the value of their investments fluctuate and see potential losses
State four limitations of using an asset allocation model
It does not recommend an appropriate tax wrapper/does not take into account the client’s tax status
Charges are not taken into consideration
Questions asked not always relevant to the client’s circumstances
Different models produce different results
Underlying assumptions subject to change/based on historic data
Needs to be reviewed/only relevant at a specific point in time
Outline the six steps of the financial planning process (ISO22222).
Establish and define the client and personal financial planner relationship
Gather client data and determine goals and expectations
Analyse and evaluate the client’s financial status
Develop and present the financial plan
Implement the financial planning recommendations
Monitor the financial plan and the financial planning relationship
Briefly describe stochastic modelling.
Stochastic means having a chance or random element.
Complete a profiling questionnaire
It is a technique that uses asset allocation
Towers Watson leading company in UK
Forecasts a range of possible returns from different portfolios
Helps clients choose the appropriate portfolio of investments by
showing the range of possible outcomes from each portfolio and the probability of achieving them
Explain to your client why their multi-asset fund* may be suitable for their attitude to risk.
(* Insert appropriate fund depending on the fact find).
Diversification across all asset classes / geographical spread
Potential for growth
Correlation of assets controlled
Reduces volatility/risk
Actively managed / professional management
Rebalances regularly
Risk rated to match ATR
Access to specialist investments
State three different methods of fee charging. (3)
Fund based/percentage of assets
Time based Fixed
Your clients have asked you for further clarification on how they can pay for advice. Identify three benefits and three drawbacks for them for each of the remuneration strategies below:
i) Fund-based trail fees
ii) Time-based charging
Fund-based advantages
-Easy to understand/value for client
-Ease of payment; provider/product pays rather than client
-Planner has incentive to grow assets/receives higher fee if assets grow
Fund-based disadvantages
-Larger portfolios not generally harder to administer/fee does not always accurately reflect time spent
-Separate/additional charges would need to be applied for tax planning/insurance recommendations
-Difficult for client to quantify charge year on year/not transparent
Time based advantages
-Familiarity/ability to compare/same as other professionals
-Easy to understand and value
-Basis of charge based on amount of work and complexity
-Charges do not increase just because fund values increase/can set budget/agree in advance
-Charge independent of product sale and paid from personal funds
Time based disadvantages
-Sometimes perceived to reward inefficiency/incentive to ‘run up the clock’
-May lead to client avoiding contact due to worries about cost
-Client will need to make payment from personal funds/net income
-Advisory Services are VAT rated and subject to further 20% VAT (intermediation services (not advice) are not VAT rated)