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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
What are the RDR requirements when giving advice?
- 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
Definition of Investment
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
Definition of Speculation
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
Main Responsibilities of an Advisor
- Help clients decide on objectives - Document clients investment products - Determine investment strategy - Carry out necessary admin
29
What is involved when developing an investment strategy?
- Assessing where action is needed - Prioritising what should be addressed - Identify what actions should be left for a later date - Developing potential solutions
30
What to include when assessing assets and investments
- Relevance to needs of client - Whether they are affordable options - Risks associated - Liquidity - Tax treatment
31
What is included in a Plan for a client?
- Clients existing position - Identify areas that need addressing - Details recommendations and suitability to client - Document areas where action has been deffered
32
Why should clients have ongoing meetings?
- Economic or market changes - Profits may need to be taken - Investments may need to be switched - Clients circumstances change
33
What are the objective factors for a clients risk profile?
- 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
Attitude to Risk Objectives - INCOME
- 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
Attitude to Risk Objectives - GROWTH
- 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
What is Capacity for Loss?
It is about how much risk can be afforded to take
37
Details when assessing clients CFL
- Understanding clients income & expenditure - Understanding clients asset profile - Understand clients circumstances
38
Principles for Business - Integrity
A firm must conduct its business with integrity
39
Principles for Business - Skill, care & due-diligence
firm must conduct its business with due-skill, care & due diligence
40
Principles for Business - Management & Control
firm must order its affairs in a responsible manner with adequate risk management
41
Principles for Business - Financial Prudence
Firm must maintain adequate financial resources
42
Principles for Business - Market Conduct
Firm must observe proper standards of the market
43
Principles for Business - Customers Interests
Firm must pay due regard to its customers & treat them fairly
44
Principles for Business - Communications with clients
must pay due regard to its customers & treat them fairly
45
Principles for Business - Conflict of Interests
A firm must manage conflict of interests fairly
46
Principles for Business - Customers relationship of trusts
firm must take responsible care to ensure sustainability of advice
47
Principles for Business - Client Assets
Firm must arrange adequate protection for assets
48
What is the financial theory?
As a level of risk taken increases, return has to increase to compensate investors
49
What is appropriateness?
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
What info should an advisor gather when assessing?
- 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
What is ESR investing?
Investment decisions may involve taking into account ethical/moral beliefs
52
What is Socially Responsible Investing?
- 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
What is ethical investing?
Investing based on ethical or moral principle & filtering out ethical companies
54
What is Impact investing?
- Investing to generate positive environmental or social impact with explicit measurable impact goals - Accept positive impact as part of investment return
55
What is Philanthropy investing?
- Investing that lies at an extreme beyond impact investing as they expect to see financial return
56
What is washing?
Re-branding to capitalise on demand for environmental & social performance
57
What is Corporate social responsibility?
- 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
What is the FTSE4Good Index Series?
- measures performance of companies that meet globally recognised corporate responsibility standards
59
What is the FTSE4Good policy comittee role?
- Act as a judge for companies to meet index criteria - Oversea consultation process undertaken to develop criteria - Approve criteria revisions or new criteria
60
What is MSCI KLD 400 Social Index?
- US equivalent of FTSE400Good - 400 companies make it back
61
What is Calvert US large-cap core responsible index?
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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