Modeling

Question 1

Advantages of lifetime cashflow modelling

Answer 1

SWIG-RAS

Shortfalls in current/future cashflow
Withdrawls impact
Inflation impact
Growth rates based on ATR

Required returns identified
Adjustable as circumstances change
Stress testing investments

Question 2

Factors and assumptions for lifetime cashflow modelling

Answer 2

What’s there/What can we assume

B
-Income changes
-Other sources of income/capital
A
-Other non-finanacial assets
N
-Target amount
T
-Life expectancy
T
-Current/likely taxes
-Use of wrappers
E
-Patern of expenditure through retirement
-Lifetime gifting
-Lump sum capital requirements
R
-ATR and capacity for loss
-Inflation expectations
-Growth rate
-Charges
R
-Health/LTC needs

Question 3

Limitations of cashflow modelling

Answer 3

FACT-R

Figures estimated and requires review
Assumptions can turn out to be wrong
Circumstances/objectives may change
Tax conditions and wrappers may change
Risk liquidity/market not taken into account

Question 4

Describe stochastic modelling

Answer 4

CPAFHP

Stochastic means a chance of random event
Complete a profiling questionnaire
Technique uses asset allocation
Forecasts range of possible returns from different portfolios
Helps clients choose the appropriate portfolio of investments by showing the range of possible outcomes for each portfolio
And the probability of achieving them

Question 5

Limitations of asset allocation modelling for income planning

Answer 5

WARMER

Wrappers - wrappers and tax position not taken into account/recommended
Assumptions- assumptions change/based on historic data
Relevant - Questions asked are not always relevant
Models - different models produce different results
Excludes- charges
Review- needs reviewing/only relevant at a specific time

Question 6

What is the process for using a risk profiling tool?

Answer 6

Client(s) complete questionnaire
Focus on priorities, time scales, and circumstances
Answers fed into computer software
This deduces a risk score
Score recommends an asset allocation
Often uses the efficient frontier for investments
Result discussed with client(s)
Ensure risk matches their interpretation of risk

Question 7

Describe psychometric modelling

Answer 7

Aims to assess the clients’ psychological risk tolerance

Complete a series of questions based on
-how they asses themselves for risk tolerance
-history of their behaviour with regsrd to financial desicion making
-intended financial behavior in the future
-How they may behave in a range of scenarios
-Their emotional response to various events and outcomes

Gives a risk score that compares the risk tolerance with a large group of investors worldwide

Client chooses thier preferred investment mix from a range of portfolios