Mixed (Non Case Study) Exam Questions Flashcards

1
Q

State the process that a financial adviser should follow when providing (8) appropriate financial advice.

A

 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

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2
Q

Identify the factors that would typically influence a client’s tolerance for risk.

A

 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

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3
Q

Outline the factors an adviser should consider and the process they should follow when recommending a fund switch. (10)

A

 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

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4
Q

What are the benefits to a client of receiving and acting upon advice from an (10) authorised financial adviser?

A

 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

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5
Q

State seven key benefits for of receiving ongoing financial advice.

A

 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

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6
Q

Explain the difference between capacity for loss and attitude to risk. (2)

A

 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

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7
Q

State four limitations of using an asset allocation model

A

 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

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8
Q

Outline the six steps of the financial planning process (ISO22222).

A

 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

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9
Q

Briefly describe stochastic modelling.

A

 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

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10
Q

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).

A

 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

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11
Q

State three different methods of fee charging. (3)

A

 Fund based/percentage of assets
 Time based  Fixed

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12
Q

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

A

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)

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