No Specific Objective Flashcards
State five benefits and five drawbacks of Alan and Lydia repaying part or all of their mortgage with their current investments (10)
Benefits
Benefits • Increases their disposable income • Save on interest payments • Improve credit rating • Less protection requirements • Reduction of investment risk
State five benefits and five drawbacks of Alan and Lydia repaying part or all of their mortgage with their current investments (10)
Drawbacks
Drawbacks
• Reduced liquidity
• Other objectives affected
• Loss of tax efficiency of ISAs
• Loss of investment income / potential future growth
• Potential penalties on mortgage reduction
• May be difficult to borrow funds again in the future, based on their current employment and
income situation
Identify and explain the tax efficient ways Alan and Lydia can immediately improve their current income
• Switch to better interest rates for the deposit funds
• They have unused Personal Savings Allowances therefore any additional interest will be
taxed at 0%
• Switch to better interest rates for their cash ISA holdings
• Take the interest from the cash ISAs on a monthly basis
• This will be tax free
• Switch Stocks and Shares ISA holdings to income units rather than accumulation units and
take the distributions as tax free income
• Switch the Stocks and Shares ISA holdings to higher yielding / more income bearing funds
and take the distributions as tax free income
• Switch the mortgage to a fixed rate, which should be lower than their current standard
variable rate
• Resulting in lower monthly mortgage repayments
• Claim child benefit for Amy and Jacob (if not already doing so)
• As both will have adjusted income of under £50,000 for the current tax year
• This will create a tax-free income of £35 per week / £1,820 per year
• With no Child Benefit High Income charge payable
State four benefits and four drawbacks to Alan and Lydia if they pay adviser fees for the initial and ongoing service:
(i) On an hourly cost basis (8) (ii) As a fund-based fee (8)
(i) Hourly cost basis
Benefits hourly cost basis
• Familiar or same as other professionals
• Easy to understand, compare and is transparent
• Based on the actual work undertaken, the amount invested is irrelevant or can work out
cheaper for larger sums
• Fee cap can apply
Drawbacks
• Perceived as inefficient or possibly ‘run up the clock’
• May put off clients making contact or asking for advice
• Paid from personal funds, net earnings/ write a cheque
• Unknown total cost
State four benefits and four drawbacks to Alan and Lydia if they pay adviser fees for the initial and ongoing service:
(i) On an hourly cost basis (8) (ii) As a fund-based fee (8)
As a fund based fee
Fund based fees
Benefits
• Negotiate lower fees for larger investments
• Payment via provider/not from personal funds
• Incentive to grow funds
• Attractive for lower amounts/lower fees for lower amounts
Drawbacks
• Difficult to predict year to year
• May not be in line with service provided/ not reflecting the time spent/larger portfolio’s
not generally harder to administer
• Extra charges may apply for other services
• Reduces potential investment growth/taken from tax efficient investments e.g.
ISA/GPPP
Identify six key benefits the clients will derive from having regular reviews and contact with their financial adviser
• Change in personal circumstances/objectives can be identified
• Change in financial circumstances/tax status/income/expenditure/new monies can be
identified
• Ensures plans / advice are up to date / on track / suitable
• Builds a long-term relationship/ ongoing questions / advice
• New products / economic / legislative changes / use of tax allowances can be discussed
• Review performance / rebalancing / attitude to risk /asset allocation
Outline to Alan and Lydia the process an adviser would use when providing them with investment advice (1
- Establish goals and expectations and the time scales involved.
- Confirm whether income or growth is required
- Confirm attitude to risk and
- Capacity for loss
- Identify the levels of emergency funds required.
- Establish current and future tax status.
- Full details of existing investments / recent statements
- Establish an appropriate asset allocation.
- Select the appropriate funds for new monies and for any switches
- Allocate tax wrappers.
- Implement, monitor, review and rebalance
Explain the potential benefits to Alan and Lydia if they decide to receive and act on advice provided by a qualified financial adviser
- Identify their financial objectives, goals, and priorities they have
- For their personal needs and that of their new company
- Benefit from research
- Budgeting/cash flow
- Assessment of suitability of existing arrangements
- Tax planning, use of tax wrappers or tax efficiency
- Assess attitude to risk (ATR) and capacity for loss
- Receive recommendations/create a financial plan
- Dealing with professionals/knowledge/clarity of explanation
- Ongoing service/reviews
- Consumer protection/regulated advice
Alan and Lydia would like to ensure they can achieve their financial objectives and have heard that a cash flow forecast may be of help to them.
(i) Identify the main factors and assumptions that you should discuss with Alan and Lydia when formulating a cashflow model (10
i) • Expected future expenditure pattern • Expected future income pattern / growth of the business • Expected longevity • Attitude to risk • Capacity for loss • Expected growth rates in respect of investments • Assumptions for fees / charges • Inflation rates • Use of tax efficient wrappers
Alan and Lydia would like to ensure they can achieve their financial objectives and have heard that a cash flow forecast may be of help to them.
(ii) Explainthebenefitsofusingacashflowforecastinestablishingastrategyformeeting Alan and Lydia’s financial objectives (8)
(ii)
• Allows the adviser to compare the income Alan and Lydia expect to receive with their expected expenditure pattern
• Both now and in the future
• The adviser can stress test different scenarios
• To understand the impact various future events would have on their ability to cover
outgoings
• This will allow the adviser to identify potential shortfalls / when capital will be exhausted
• And then to put in place plans to avoid these occurring / determine which assets to use to
cover these shortfalls
• The cash flow forecast allows assumptions to be made for investment growth and inflation
7
AF5 February 2022: No specific objective
• These can be adjusted as circumstances change to ensure the figures are meaningful
• The cash flow forecast can help the adviser determine a suitable asset allocation for Alan
and Lydia’s pensions and investment
Alan and Lydia would like to ensure they can achieve their financial objectives and have heard that a cash flow forecast may be of help to them.
(iii) Outline the risks of relying solely on cash flow modelling to help them meet their financial objectives (6)
(iii)
• Assumptions can be incorrect
• Provides estimate only / requires regular review
• Personal objectives / circumstances may change
• Cashflow mode returns are linear
• Tax rule / rates may change / not all systems account for tax wrappers
• Difficult to fully take account of market risk / systematic risk / political risk
• Does not consider liquidity of assets / investments / liquidity risk
- Alan and Lydia would like to ensure they can achieve their financial objectives and have heard that a cash flow forecast may be of help to them.
(iv) Outline six scenarios that should be discussed with Alan and Lydia when carrying out a stress test of their cash flow forecast (6)
(iv)
• Permanent loss of income source / capital assets (e.g. market crash)
• Future returns are lower than forecast
• Income requirements are higher than forecast
• Large unplanned capital withdrawal
• Inflation higher than forecast
• Living longer than expected
• Adverse change in personal circumstances (e.g. death / divorce)
Explain the issues that Alan & Lydia would face if they were to seek a new fixed rate mortgage from a company other than their existing lender (4)
• Increased costs / new valuation requirement / Land registry costs
• Fresh affordability calculation requirement
• Income currently tight / no income at present
• Unlikely to be approved whilst no income drawn / no track record of profits to support
application
