Need for Reviews

Question 1

Identify key events relevant to Tom and Sally’s circumstances when a review should be conducted, other than regular annual reviews (15)

Answer 1

Investment portfolio performance • In adverse market conditions leading to the need to rebalance their investment/pension portfolio/any changed in risk profile • Change in their personal circumstances • Change in circumstances of Hannah (leaving university, marriage, etc) • Any inheritances received • End of year tax planning - maximise use of ISAs/CGT exempt amounts • Changes in their health • Change in their attitudes to risk/capacity for loss • Changes in taxation or legislation • If their respective incomes increase or decrease markedly • Changes in their income or capital needs • Changes in expenditure • Review goals – on track with existing ones, any new goals • Any changes made to pension nomination forms • Any gifts made or and future gifts planned • New products coming on the marke

Question 2

Identify the key benefits Tom and Sally will derive from having regular reviews and contact with a financial adviser (8)

Answer 2

The adviser can help them prioritise their objectives/ determine how best to use their funds to achieve their aims • They can advise on how best to invest the couple’s funds to generate the income/growth levels required • Can use a cash flow forecast to establish the sustainability of their desired lifestyle based on various longevity assumptions • The adviser will ensure full use is made of tax exemptions and allowances to minimise the amount of tax paid both now and in the future  Can ensure their funds are invested in line with their ATRs and capacity for loss  They can ensure that each will have sufficient income in the event that the other pre-deceases them • They can advise on how the couple can mitigate their IHT liabilities • They can review their finances regularly and adjust the plans made to take account of any changes in their circumstances/ goals and any changes in legislation • They can potentially take advantage of new products that have come to the market

Question 3

If you can’t remember the circumstances specific to the client when a review should be carried out, then the following should help you pick up some marks. When is the best time to carry out a review? Answer: at HALF PAST NINE!

Answer 3

H ealth A ttitude to risk L egislation changes F und performance P ortfolio rebalancing A ltered personal circumstances S tate Benefits T axation N eed for capital I ncome need changes N ew products available E xtra money to invest – change in circumstances

Question 4

Tom and Sally have asked you for further clarification on how they can pay for advice. Identify three benefits and three drawbacks of:  Fund-based trail fees (8) 

Answer 4

Fund-based trail fees benefits:  May be able to negotiate lower fees  Ease of payment  Provider/investment contract pays rather than Tom and Sally  Planner has an incentive to grow assets/will receive higher fee if assets grow Fund-based trail fees drawbacks:  Larger portfolios not generally much harder to administer  Fee does not always accurately reflect time spent  Separate/additional charge would need to be applied for tax planning/insurance recommendations  Difficult for Tom and Sally to quantify charge from year to year

Question 5

Tom and Sally have asked you for further clarification on how they can pay for advice. Identify three benefits and three drawbacks of:   Time-based charging (9)

Answer 5

Time-based charging benefits:  Familiarity/ability to compare – same as other professionals’ such as accountants and solicitors use  Easily understood/ transparent  Charge to Tom and Sally based on amount of work and complexity/ amount invested is irrelevant/ cheaper for larger sums  Charges do not increase merely when fund values increase/can agree fee cap  Lack of conflict/charge independent of product sale Time-based charging drawbacks:  Sometimes perceived to reward inefficiency/incentive to ‘run up the clock’  May lead to Tom and Sally avoiding contact/work due to worries about cost  Tom and Sally will need to actually make the payment  Final costs are unknown/ can be high costs if small amounts are invested