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Chpt 1 - CISI > Process of giving investment advice > Flashcards

Process of giving investment advice Flashcards

1
Q

What are the 3 Perspectives of a relationship between advisor and client?

A
  • LEGAL - Different limitations and regulations which must be disclosed to customers and mean different legal responsibilities
  • PERSONAL - To be able to provide appropriate advice advisors need a good deal of background info on clients which may only be given for good integrity
  • SKILLS - Advisor needs special skills
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2
Q

Skills needed by an advisor

A
  • PERSONAL - create a trusting and open relationship with their client
  • ORGANISATIONAL - well organised & disciplined in managing their diary and activities
  • TECHNICAL COMPETENCE - necessary technical knowledge & skills needed to gain clients’ confidence
  • INTEGRITY - absolute confidence in advisors integrity
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3
Q

What information is required by the advisor from the client?

A

Some form of Investment Policy Statement (IPS) will need to be obtained and maintained by advisors

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4
Q

What income is included when assessing a clients financial situation?

A
  • Income earned from employment & pensions
  • unearned income
  • rents on an investment property
  • financial support from others
  • state benefits
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5
Q

What outgoings are included when assessing a client’s financial situation?

A
  • Rent & bills
  • Rates & council tax
  • Vehicle running costs
  • Credit card/loans
  • insurance premiums/contribution to pension
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6
Q

Investment objective categories for Clients

A
  • INCOME - investors seek higher current income over growth
  • INCOME & GROWTH - need a certain amount of income and growth
  • GROWTH - the primary objective is capital appreciation
  • OUTRIGHT GROWTH - investors seek max return through a range of investments
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7
Q

What is a clients risk tolerance?

A

It is subjective as it depends on the emotional make up of a person.
It is also objective as it depends on how much risk a person can assume.

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8
Q

What is liquidity referred to when assessing a client?

A

Liquidity refers to how much funds may be needed in a short or long term

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9
Q

What is Time Horizon referred to when assessing a client?

A

Time horizon refers to the period over which a client can consider investing their funds:
Short term = up to 5 years
Mid term = 5 - 10 years
Long term = 10+ years

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10
Q

Why do you need to establish tax status when assessing a client?

A

Advisor needs to establish residence and domicile to identify tax status, this is to show tax liability and reliefs available

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11
Q

What are the 4 key drivers of Vulnerability?

A
  • HEALTH - terminal illness could impact decisions
  • RESILIENCE - lower income clients may not be able to withstand financial shocks
  • LIFE EVENTS - such as divorce or bereavement
  • CAPACITY - disability, debt, lack of access to financial products
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12
Q

Further signs of vulnerability are:

A
  • Reliance on others
  • Displaying unusual behaviour
  • Be unresponsive
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13
Q

What must an advisor do when interacting with vulnerable clients?

A
  • Provide tailored advice in an understanding manner
  • Discuss having a trusted 3rd party present
  • Ensure appropriate authority on file
  • Document matters
  • Provide aids where needed
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14
Q

Steps when documenting vulnerable clients:

A
  • Any identified vulnerability must be documented and accommodated for
  • Record details of any 3rd parties present
  • details of clients medical history
  • detail any impairments
  • record any unused advice and why
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15
Q

What are Robo-advisors?

A

They use surveys to take the info of clients which is then put into an algorithm to build a diversified portfolio.

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16
Q

Advantages of Robo-advisors

A
  • Easy account setup
  • Automated process
  • Low minimum balances
  • Low fee’s and charges
  • Tax Efficient
  • Can remove behavioral Bias
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17
Q

Disadvantages of Robo-advisors

A
  • Not personalised
  • Not for clients with complex portfolios
  • Limitations in technology
  • Performance is not guaranteed
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18
Q

What is the Fair Treatment of Customers (FTOC)?

A

It was introduced in 2006 and aims to support the requirements of the FCA’s principle 6 - ‘A firm must pay due regard to the interests of its customers and treat them fairly’

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19
Q

FTOC Initiative - Outcome 1

A

firms have fair treatment of customers as central to corporate culture

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20
Q

FTOC Initiative - Outcome 2

A

Products & services are marketed & sold are designed to meet needs of consumer groups

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21
Q

FTOC Initiative - Outcome 3

A

consumers are provided clear info and appropriately informed

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22
Q

FTOC Initiative - Outcome 4

A

advice given to consumers is sustainable & takes into account circumstances

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23
Q

FTOC Initiative - Outcome 5

A

consumers are given products & services to an acceptable standard they are lead to believe

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24
Q

FTOC Initiative - Outcome 6

A

consumers are not subject to unreasonable post sale barriers

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25
Q

What are the RDR requirements when giving advice?

A
  • Advisors can set their own charges
  • chargers should have charging structures on level of service
  • Price list used to discuss charges upfront
  • Ongoing charges levied when an ongoing service has been agreed
26
Q

Definition of Investment

A

A great deal of knowledge and resources directed towards understanding the risk factors in each asset class. This is generally mid-long term via diversified portfolio of assets.

27
Q

Definition of Speculation

A

May be limited knowledge or no knowledge about the risks borne by an investor. Speculation is based on profiting from the short term price movements of assets.

28
Q

Main Responsibilities of an Advisor

A
  • Help clients decide on objectives
  • Document clients investment products
  • Determine investment strategy
  • Carry out necessary admin
29
Q

What is involved when developing an investment strategy?

A
  • Assessing where action is needed
  • Prioritising what should be addressed
  • Identify what actions should be left for a later date
  • Developing potential solutions
30
Q

What to include when assessing assets and investments

A
  • Relevance to needs of client
  • Whether they are affordable options
  • Risks associated
  • Liquidity
  • Tax treatment
31
Q

What is included in a Plan for a client?

A
  • Clients existing position
  • Identify areas that need addressing
  • Details recommendations and suitability to client
  • Document areas where action has been deffered
32
Q

Why should clients have ongoing meetings?

A
  • Economic or market changes
  • Profits may need to be taken
  • Investments may need to be switched
  • Clients circumstances change
33
Q

What are the objective factors for a clients risk profile?

A
  • TIMESCALE - determines what products are suitable & risks adopted
  • COMMITMENTS - Likely to impact risk profile
  • WEALTH - clients with few assets may not be able to lose them
  • LIFE-CYCLE - Longer time horizon = more prepared for risk
  • AGE OF CLIENT
34
Q

Attitude to Risk Objectives - INCOME

A
  • CAUTIOUS - willing to accept lower level of income for lower risk
  • BALANCED - balance potential risk with potential for income growth
  • ADVENTUROUS - willing to adopt more aggressive strategies that offer potential for higher income
35
Q

Attitude to Risk Objectives - GROWTH

A
  • CAUTIOUS - seeking maximum growth & income consistent with modest degree of risk
  • BALANCED - balance potential risk with the growth of both income & capital
  • ADVENTUROUS - able to adopt a long term view that permits the pursuance of a more aggressive strategy
36
Q

What is Capacity for Loss?

A

It is about how much risk can be afforded to take

37
Q

Details when assessing clients CFL

A
  • Understanding clients income & expenditure
  • Understanding clients asset profile
  • Understand clients circumstances
38
Q

Principles for Business - Integrity

A

A firm must conduct its business with integrity

39
Q

Principles for Business - Skill, care & due-diligence

A

firm must conduct its business with due-skill, care & due diligence

40
Q

Principles for Business - Management & Control

A

firm must order its affairs in a responsible manner with adequate risk management

41
Q

Principles for Business - Financial Prudence

A

Firm must maintain adequate financial resources

42
Q

Principles for Business - Market Conduct

A

Firm must observe proper standards of the market

43
Q

Principles for Business - Customers Interests

A

Firm must pay due regard to its customers & treat them fairly

44
Q

Principles for Business - Communications with clients

A

must pay due regard to its customers & treat them fairly

45
Q

Principles for Business - Conflict of Interests

A

A firm must manage conflict of interests fairly

46
Q

Principles for Business - Customers relationship of trusts

A

firm must take responsible care to ensure sustainability of advice

47
Q

Principles for Business - Client Assets

A

Firm must arrange adequate protection for assets

48
Q

What is the financial theory?

A

As a level of risk taken increases, return has to increase to compensate investors

49
Q

What is appropriateness?

A

Appropriateness requires firms to ask the client for info about their knowledge & experience in the investment field of a product so they can assess whether it is appropriate

50
Q

What info should an advisor gather when assessing?

A
  • Types of services & transactions which customer is familiar with
  • Nature, volume, frequency, time that a customer has been involved in services
  • Customers education & profession
51
Q

What is ESR investing?

A

Investment decisions may involve taking into account ethical/moral beliefs

52
Q

What is Socially Responsible Investing?

A
  • Investments driven by individual values
  • Most important issues for SRI is shareholder engagement, whereby shareholders may enter into dialogue with management to encourage behavioral change
53
Q

What is ethical investing?

A

Investing based on ethical or moral principle & filtering out ethical companies

54
Q

What is Impact investing?

A
  • Investing to generate positive environmental or social impact with explicit measurable impact goals
  • Accept positive impact as part of investment return
55
Q

What is Philanthropy investing?

A
  • Investing that lies at an extreme beyond impact investing as they expect to see financial return
56
Q

What is washing?

A

Re-branding to capitalise on demand for environmental & social performance

57
Q

What is Corporate social responsibility?

A
  • Is a form of corporate self-regulation integrated into a business model
  • Business adhere to law, ethical standards and norms
  • Deliberate inclusion of public interest into corporate decision making
58
Q

What is the FTSE4Good Index Series?

A
  • measures performance of companies that meet globally recognised corporate responsibility standards
59
Q

What is the FTSE4Good policy comittee role?

A
  • Act as a judge for companies to meet index criteria
  • Oversea consultation process undertaken to develop criteria
  • Approve criteria revisions or new criteria
60
Q

What is MSCI KLD 400 Social Index?

A
  • US equivalent of FTSE400Good
  • 400 companies make it back
61
Q

What is Calvert US large-cap core responsible index?

A

It is a stock market index created by calvert investments as a benchmark of large companies that are considered CSR

Chpt 1 - CISI (7 decks)

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