Practice Test 5 - Tim & Emma

Question 1

Explain the potential benefits for Tim and Emma if they decide to receive and act on advice received from a qualified financial adviser.

Answer 1

• Identify their financial problems, goals and priorities they have.
• Benefit from research.
• Budgeting/cashflow.
• 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 professional/ knowledge/clarity of explanation.
• Ongoing service/reviews.
• Consumer protection/regulated advice.

Question 2

Tim and Emma would like information about how any financial advice they receive from an adviser will be paid for. Outline two benefits and two drawbacks to Tim and Emma of an adviser using:
fixed fees

Answer 2

Benefits of fixed fees:
• They will know what they will pay for/ transparent/easy to understand/ helps with budgeting and not deducted from investment.
• They will not worry that every time they contact the adviser further costs will be incurred.
Drawbacks of fixed fees:
• May not be good value for money.
• They may not understand how the fixed fee has been arrived at.

Question 3

Tim and Emma would like information about how any financial advice they receive from an adviser will be paid for. Outline two benefits and two drawbacks to Tim and Emma of an adviser using:
time-based charging.

Answer 3

Benefits of time-based charging:
• Not linked to investment value/ not deducted from investment value.
• Familiar with this approach, perceived as fair/similar to remuneration for other professionals.
Drawbacks of time-based charging:
• May feel that it promotes inefficiency/advisor running up clock.
• Unknown cost/reluctance to seek advice due to cost.

Question 4

State the additional information an adviser would require to advise Tim and Emma on their retirement planning objective.

Answer 4

• Income/capital required in retirement.
• Intended retirement date.
• Projected benefits at retirement/statement of benefits.
• Asset allocation/fund choice.
• Charges.
• Growth/inflation rate assumed.
• Retained benefits.
• Form BR19/ state pension entitlement/ national insurance contributions (NIC) record.
• Capacity for loss.
• Affordability.
• Ethical preferences.
• Any expected inheritances.
• Health.
• Prepared to use other assets/ISAs/downsizing.

Question 5

When considering Tim and Emma’s current protection arrangements and their stated objectives:
Outline the areas where further protection planning is necessary for Tim and Emma.

Answer 5

• Income or lump sum in the event of either death.
• Lump sum or income in the event of either suffering a critical illness.
• Replacement income in the event that Tim is made redundant.
• Replacement income in the event that Emma is unable to work due to sickness or disability.
• They need to make Wills.

Question 6

When considering Tim and Emma’s current protection arrangements and their stated objectives:
State the factors an adviser should take into account when constructing a plan to meet the needs identified in part (d)(i) above.

Answer 6

• Tim has current Death-in-service (DIS)/£240,000/4 times DIS.
• Return of fund payable on PPP/£205,000/£85,000.
• Death benefit nomination.
• They have Private medical insurance (PMI)I cover/ they have life cover for the mortgage.
• Emma has no existing life cover.
• Neither has any existing critical illness cover (CIC) cover.
• Emma has no income protection.
• No unemployment cover for Tim.
• Combined life and CIC provides cost effective cover/stand alone life and CIC provides wider cover.
• Outgoings required in the event of either death/child care/illness/Tim is the main bread winner.
• Health.
• Affordability/budget.
• Term to retirement/children’s dependency/timescale/term.
• Level of savings/emergency fund required.
• State benefits eligibility/entitlement.
• They have not made Wills/need to make Wills.

Question 7

When considering Tim and Emma’s current protection arrangements and their stated objectives:
Recommend and justify a suitable product for Emma to receive an income, if she was unable to work due to long-term illness.

Answer 7

• Income Protection Insurance (IPI).
• 50-65%/maximum.
• To maintain the standard of living.
• Own occupation.
• For widest cover.
• Deferred period of 13 weeks minimum.
• To keep costs down, as they have savings to cover lost earnings for the initial period, to match state benefits.
• Term to retirement/60 or 65.
• Guaranteed premium.
• To help with budgeting/known cost.
• Indexed cover.
• To protect against inflation/increase in profits.
• Proportional benefit.
• Allow return to work at a lesser paid job.
• Can claim more than once/multiple claims/insurer cannot cancel.

Question 8

Emma has been informed that the standard deviation of the share portfolio is 4%. Explain what this means in terms Emma and Tim will understand.

Answer 8

• It is a measure of volatility or risk.
• This is based on past performance.
• 65 -70% of the time.
• The portfolio will perform within ± 4% of the mean/average/expected return and for 95% of the time.
• Within ± 8%.

Question 9

Tim and Emma are considering selling the shares to repay their mortgage. Outline four benefits and four drawbacks of this proposed course of action.

Answer 9

Benefits:
• Matches cautious attitude to risk.
• Free of debt.
• Increases disposable income/no longer paying interest.
• No Capital Gains Tax liability on encashment.
Drawbacks:
• Loss of investment potential/no investment growth/loss of dividends.
• Early repayment charges/cost of selling shares.
• Market timing.
• Lack of liquidity.