R06 Flashcards
What are the six steps of the financial planning process as described by ISO 22222?
1 - Establish and define the client and personal financial planner relationship.
2 - Gather client data and determine goals and expectations.
3 - Analyse and evaluate the client’s financial status.
4 - Develop and present the financial plan.
5 - Implement the financial planning recommendations.
6 - Monitor the financial plan and the financial planning relationship.
Who would typically be considered a vulnerable customer?
HINT: 3 categories.
On account of:
- age,
- state of health or mind,
- recently bereaved.
How long should records of life and pension policies be held for?
Life assurance and pensions - keep records for 5 years.
Client’s objectives should follow the acronym SMART; what does SMART stand for?
- Specific
- Measurable
- Action-related
- Realistic
- Time-related
Name 3 benefits of using a financial planner?
- Identifying problems and goals.
- Identifying financial strategies.
- Setting priorities.
- Researching the market for the best products.
- Getting the planning done.
- Making and/or preserving wealth.
- Avoiding common financial mistakes.
What is a ‘risk premium’?
The difference in the rate of return between an investment involving risk and a risk-free investment.
What is ‘risk capacity’?
The amount someone can afford to lose without endangering their financial objectives.
What does ‘capacity for loss’ mean?
The client’s ability to absorb any negative financial outcome that may arise from an investment.
What is the ‘critical yield’?
The rate of return needed to meet the objective based on a given level of investment.
What is the aim of ‘psychometric risk profiling’?
Assesses psychological risk tolerance instead of objective financial capacity to take risks.
What is fact-finding?
Skilled process of gathering client data, it is essential to gather sufficient information to ensure recommendations are suitable and relevant.
Name 3 things you would need to understand about being a member of an occupational DC scheme?
- Type of scheme.
- Level of contributions.
- Death in service benefits - in trust or expression of wish.
- Value of fund.
- Previous protection in place.
- Auto-enrolment/3% employer contribution since 2019.
- Whether flexi-access/UFPLS is available from current provider/desired by client.
Who are the legal owners of trust property?
The Trustees.
What are 2 issues with centralised investment propositions?
- Shoehorning.
- Charges.
- Conflicts of interest.
- Blurring of responsibilities.
What does the ‘real rate of return’ take into account?
Inflation.
What should a summary of earned income set out?
HINT: 8 things.
- Level of income.
- Source of earnings.
- Employment status.
- Volatility of earnings.
- Job security.
- Employee benefits.
- Pension position.
- Tax position.
What is a current cash flow statement?
The total income less total expenditure for the current period.
Name 3 risks with potentially major financial implications?
- Death of family member.
- Unemployment/business failure.
- Illness/accident.
- Divorce/separation.
- Devaluation of business/property.
- Investment risk.
- Longevity - outliving resources.
What is a lifetime cash flow projection used for?
To forecast clients’ income and expenditure profiles over the longer term.
What does a benchmark/standard priority list normally look like?
HINT: 7 things.
- Cover day to day living expenses.
- Protection against the unexpected.
- Buying a home and raising a mortgage.
- Paying for children’s education.
- Saving for retirement.
- Saving and investing.
- Estate planning.
What is prospect theory?
Losses have greater emotional impact than the equivalent amount of gains.
What is the general strategy for dealing with debt?
HINT: 5 things.
- Clear high-cost debt as quickly as possible.
- Set up short-term savings to avoid debt in the future.
- Consider flexible mortgage for self-employed or those with variable income.
- Choose loan repayment that fits with client’s risk profile.
- Protect loans with insurance.
Name 2 elements of taxation that the Government has introduced for buy-to-let landlords in an attempt to help the first-time buyer market?
- Extra 3% on Stamp Duty Land Tax for second properties/buy-to-let properties over £40,000.
- CGT surcharge of 8%.
What is the usual waiting period for ‘Support for Mortgage Interest’?
39 weeks (unless claiming State Pension Credit in which case no waiting period).
State 3 disadvantages of redundancy cover?
- Policy may never pay out.
- Policies are expensive.
- Benefit paid for set period.
Why must care be taken when choosing a P2P lender?
They are not covered by the Financial Services Compensation Scheme (FSCS).
Describe phased drawdown?
The use of flexi-access drawdown/UFPLS to delay annuity purchase but provide the required retirement funds in the meantime.
State 2 advantages of the ‘two pools’ approach to asset allocation for retirement income?
- Provides strong defence against market downturns.
- Spendable income for chosen period is secure.
- Allows focus on growth for adventurous pool.
- Able to ride out a major stock market fall.
What are 3 important criteria when choosing a protection product?
- Cost.
- Financial strength or provider.
- Underwriting.
When explaining and justifying recommendations, how should a report be structured?
- There should be a logical structure.
- Introduction.
- Current situation.
- Aims and objectives.
- Recommendations.
- Review procedures and further work.
- Revisions, review, and monitoring.
- Economy of length.
- Accessible language.
- Attractive layout.
What are the 3 main types of platform?
- Advised.
- Direct.
- Workplace.
What is the purpose of a review?
To compare actual performance and client circumstances against the original plan.
State 2 advantages of ‘time-based charging’?
- Same method used by other professionals.
- Basis seems fair.
- Charges not linked to fluctuations in the value of the portfolio.
State 2 advantages of fixed fees?
- Certainty - client knows how much it will costs.
- Fixed - not linked to fluctuations in the stock market.
- Fair and transparent.
Name 2 changes to a contract which would not result in legacy trail being switched off?
- Automatic increase in premium due to indexation set up before 1st January 2013.
- Automated fund switches.
- Automatic rebalancing of a portfolio at set intervals.
- Non-advised reinvestment of dividends/distributions into existing investments.
Establishing Client Objectives, Needs, and Priorities.
HINT: 4 Points.
- Building adviser/client relationships takes time.
- Need to establish trust.
- Successful relationships are close and interactive.
- Knowledge and understanding of the client is more important than knowledge of products.
ISO 22222 - Step 1?
HINT: E and D R
Step 1 - Establish and Define Relationship with client.
ISO 22222 - Step 2?
HINT: G D
Step 2 - Gather Data and determine their goals and expectations.
ISO 22222 - Step 3?
HINT: A and E
Step 3 - Analyse and Evaluate the client’s financial status.
ISO 22222 - Step 4?
HINT: D and P FP
Step 4 - Develop and Present the Financial Plan.
ISO 22222 - Step 5?
HINT: I R
Step 5 - Implement Recommendations.
ISO 22222 - Step 6?
HINT: M P and R
Step 6 - Monitor Plan and Relationship.
ISO 22222 Step 1 - Establish and define the client/financial planner relationship.
Key points?
- Provide information in writing about the services being offered including: scope of services, financial planners qualifications and expertise, details of conformity to International Standard (ISO).
- Use a variety of methods to gather information from client regarding personal details, employment status, relationships, financial position, state, employer and private benefits, insurances and entitlements, immediate needs and short and long-term goals.
- Provide written documentation regarding terms of engagement (Client Agreement) setting out:
— Regulatory status of the firm and type of the firm and type of service it offers.
— Scope of services the financial planner provides.
— How they will communicate.
— Client classification.
— Record keeping.
— Anti-money laundering procedures.
— The advice process.
— Any known conflicts of interest.
— Adviser fees for initial and ongoing advice.
— Duration of agreement.
— Frequency of contact.
— Confidentiality provisions.
- Written agreement ensures client has clear understanding of services provided and cost of advice.
ISO 22222 Step 2 - Gather client data and determine their goals and expectations.
Key points?
- Additional information, e.g. assets/liabilities, needs, goals and objectives with timeframes, risk profile/tolerance/capacity, ESG (Environmental, Social and Governance) impacts, ethical and religious factors.
ISO 22222 Step 3 - Analyse and evaluate the client’s financial status.
Key points?
- Assess information gathered in relation to client’s current and future goals.
ISO 22222 Step 4 - Develop and present the financial plan.
Key points?
- Review, discuss and resolve any issues the client may have.
- A plan should be produced with suitable and usable recommendations.
ISO 22222 Step 5 - Implement the financial planning recommendations.
Key points?
- Implement in line with terms of engagement.
- Produce documentation to record extent to which recommendations are accepted.
ISO 22222 Step 6 - Monitor the financial plan and the financial planning relationship.
Key points?
- Continue to use plan and update when required.
British Standards for Financial Planning Firms
HINT: 9 overarching principles:
- T
- D
- I
- D C and D
- A
- C
- P
- C of I
- C
- Transparency
- Disclosure
- Integrity
- Due care and diligence
- Accessibility
- Confidentiality
- Professionalism
- Conflicts of interest
- Competence
Financial Planner Responsibilities?
HINT: 3 Points.
- Status of planner (make it clear before providing services whether you are independent, focused independent or restricted)
- Advice tools and investment strategies (panels used, platforms used, model portfolios used, DFMs used)
- Limits of authorisation (client must understand scope of advice and planners must realise what they are competent/authorised to do and what they are not)
Suitability
2 Key Points?
- Planner must have sufficient information to ensure recommendation is suitable and justify affordability, risk and fulfilment of objective.
- Vulnerable customers owed an additional duty of care (typically on account of age, health/mind, recently bereaved). Stricter procedures around how advice is given, amount of risk they can be exposed to.
Client Information
2 Key Points?
- Should provide a clear picture of client’s personal and financial circumstances.
- Information should be readily accessible.
Execution-only and Execution-only platforms
2 Key Points?
- Essential to give no advice at all.
- Record position with client’s handwritten confirmation.
Limited Advice
2 Key Points?
- Client should be aware of limited nature.
- Planner should record it in Suitability Report.
Professional Clients
1 Advantage?
- Save time and cost as no requirement to provide investment risk warnings or document them.
Professional Clients
1 Disadvantage?
- Lose protection given to private clients.
Collective Investment Schemes and NMPI
2 Key Points?
- Regulated collective investment schemes (CIS) are UK-based and authorised by the FCA.
- Unauthorised collective investment schemes (UCIS) and close substitutes, together known as Non-Mainstream Pooled Investments (NMPI), are not subject to the same restrictions and considered high risk. They cannot be promoted to retail clients - only professional and high net worth clients. May not be covered by FOS and FSCS. In June 2013, the FCA published its final rules banning the promotion of NMPIs to the majority of UK retail investors.
Insistent Clients
2 Key Points?
- Clients that want to make decisions not appropriate for them.
- Planners should express in writing that they wouldn’t recommend this and carry out transaction or not act for the client at all.
Who authorises Regulated Collective Investment Schemes (CIS)?
FCA.
Record Keeping
4 Key Points?
- Pension transfers, pension opt-outs and FSAVCs - no time limit.
- Life assurance and pensions - keep records for 5 years (financial promotions 6 years).
- Other policies - keep for 3 years.
- Should abide by UK General Data Protection Regulation and Data Protection Act 2018.
Fair Treatment of Customers
2 Key Points?
- Firms must strive to deliver positive customer outcomes - initially and on an ongoing basis.
- Monitor persistency, complaints and range of products/providers used.
Adviser Charging
3 Key Points?
- Commission payments from retail investment products is BANNED.
- Now advisers charge fees for advice based on the service provided.
- Fees must be disclosed in £’s, even if fee equates to a %.
Establishing Client’s Aims and Objectives
3 Key Points?
- Aims and objectives may get re-defined as a result of the fact-finding process.
- Aims may change and develop over time.
- Couples may not share the same approach to life and money.
Regulatory Position
- Financial Planner must ensure clients:
HINT: 3 Points.
- Can afford the recommended investment/financial product.
- Understand the risk involved.
- Understand how the recommendation(s) meet their needs or aims.
What are the potential benefits of receiving and acting upon advice from a qualified financial adviser?
Financial problems, goals and priorities will be identified.
Benefit from adviser’s research.
Help with budgeting/cash flow.
Assessment of suitability of existing arrangements.
Tax planning, use of tax wrappers or tax efficiency.
Assessment of 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.
List 4 benefits of paying adviser fees for initial/ongoing service:
(a) On an hourly cost basis?
Familiar or same as other professions
Easy to understand and compare
Based on actual work undertaken,
amount invested is irrelevant –
cheaper for larger sums
Fee cap can apply
List 4 drawbacks of paying adviser fees for initial/ongoing service:
(a) On an hourly cost basis?
Can be seen as inefficient – or adviser ‘running up the clock’
May put clients off making contact or asking for advice
Paid from personal funds
Unknown total cost
List 4 benefits of paying adviser fees for initial/ongoing service:
(b) As a fund-based fee?
Can negotiate lower fees for larger investments
Payment via provider if not from personal funds
Incentive to grow funds
Attractive for lower amounts /lower
fees for lower amounts
List 4 drawbacks of paying adviser fees for initial/ongoing service:
(b) As a fund-based fee?
Difficult to predict each year
May not be in line with service
provided, not reflecting time spent or larger portfolios not generally harder to administer.
Extra charges may apply for other services.
Reduces potential investment growth
List 4 benefits of paying adviser fees for initial/ongoing service:
(c) On a fixed fee basis?
Familiar or same as other professions
Known cost
Easy to understand and compare
Amount invested is irrelevant –
cheaper for large sums
List 4 drawbacks of paying adviser fees for initial/ongoing service:
(c) On a fixed fee basis?
Is fee justifiable?
Paid from personal funds
May put clients off making contact or
asking for advice
Exactly what is included?
Explain how lifetime cash flow modelling is used?
Lifetime cash flow projections are used to forecast clients’ income and expenditure profiles over the long term
They provide a year-by-year summary of cash paid to and paid out by the client, showing the years where there will be a surplus or a deficit.
The main variables are:
o The level of income and capital inputs
o The level of expenditure
o The assumptions made about future increases in income, capital values,
expenditure and inflation
o Projections can then be amended to include the effect of recommendations
Explain the benefits of a current cash flow statement when devising a financial plan?
Shows difference between expenditure and income
Highlights areas for cost reduction
Identifies opportunities to fill gaps in planning/establish planning budget
Can be used for analysing future cash flows/retirements cash flows and contingent
cash flows/loss of income on clients’ ill health/death
Enables the client to understand the long-term impact of large expenditure.
What is meant by the term ‘risk profile’?
It is the level of fluctuation/volatility that clients are prepared to accept in their investment/pension portfolio
Holding investments that are higher risk than their risk profile may result in unacceptable losses in poor market conditions
If investments are lower risk than they are prepared to accept they may miss out on higher returns
State the main factors that might influence a client’s attitude towards investment risk?
Timescale
Income/expenditure/disposable income/affordability
Assets/investments/level of wealth
Liabilities
Amount of investment available
Age of investor
Experience/understanding of market/investments
State of health
Objectives of investment/income or growth
Change in personal circumstances/marriage/death/job change
Outline the process that an adviser should follow to determine a client’s ATR by the use of a risk profiling tool?
Each client completes a risk profile questionnaire.
This focuses on timescales/priorities/responses to circumstances.
Generates a risk score
Score provides further discussion with client/used to produce asset allocation
Ascertain capacity for loss
Adviser and client agree suitable risk profile
Why should an adviser not rely solely on a computer-based risk profiling tool to confirm a client’s ATR?
Different results for each client would require further discussion
Different programmes produce different results
Client(s) may not be able to relate to content of questionnaire
Potential for client to misinterpret/misunderstand question
Will be unsuitable if they have a zero capacity for loss
Different risk may be in evidence for different objectives/timescales
State the reasons why a client’s ATR may have changed from high to medium risk?
Investment knowledge has increased/understands the risks of investments
They may have suffered losses/volatility with past choices
They might be near to retirement age/in retirement so want less risk/volatility
Client is looking for a secure income in retirement/their needs have changed
Identify and explain the key client-specific factors that you would take into consideration when assessing capacity for loss?
They have significant assets/wealth/adequate emergency fund
They can tolerate some loss/volatility
They have earned income
Level of income required
Guaranteed income from DB scheme/State pension
No potential inheritances
No liabilities
Short time frame to retirement
History of poor health in family/they are currently in good health
Why is diversification important?
Diversification can reduce risk in a portfolio
By holding a different range of assets
Each different investment can perform well in certain market conditions
The downside risk of one investment can be offset by the upside potential of another
investment
Diversification can reduce stock specific risk but not market risk
State the limitations of using an asset allocation model?
Doesn’t recommend an appropriate tax wrapper/take account of client’s tax position
Charges are not considered
Questions asked aren’t always relevant
Different models produce different results
Underlying assumptions subject to change/based on historic data
Needs to be reviewed
Understanding Client’s Aims and Objectives
Key Points?
- Recognising the client’s needs and objectives.
- Need to help clients understand general aims and specific objectives.
- Client’s objectives should be SMART (Specific, Measurable, Action-related, Realistic and Time-related).
- If objectives exceed financial capability, then prioritise.
- Family, personal relationships and dependencies are at the heart of financial planning.
- Use of open and closed questions to establish hard and soft facts.
- Another approach is listing possible aims and objectives (client chooses and ranks).
- Needs and objectives should be analysed to identify inconsistencies or conflicts.
- Distinguishing between immediate and future objectives (clients tend to emphasise short-term needs whereas planners emphasise the importance of long-term goals - compromise between the two).
- Timescale - the importance to establish and qualify long and short-term savings objectives.
- Quantifying and qualifying the objectives.
- Prioritisation - it’s not often possible to tackle all aims and objectives at the same time and priorities may change as a result of the financial planning process and over time as circumstances change.
- Needs analysis grid - technique for establishing and prioritising objectives.
Overview of ISO 22222 Stage 1?
- Establishing goals and objectives.
- Timescale.
- Income or growth.
- Capacity for loss and risk tolerance - impacted by age, health, income and wealth, experience and personality.
Overview of ISO 22222 Stage 2?
- Understanding client status, e.g. tax position and size of portfolio.
Overview of ISO 22222 Stage 3?
- Purpose.
- Objective.
- Risk statement.
Overview of ISO 22222 Stage 4?
- Asset allocation - cash, fixed interest, property and equities.
Overview of ISO 22222 Stage 5?
- Fund (stock) selection.
Overview of ISO 22222 Stage 6?
- Implementation.
- Buy funds, monitor and rebalance.
What are the benefits of using a Financial Planner?
- Identifying problems and goals.
- Identifying financial strategies.
- Setting priorities.
- Researching the market for the best products.
- Getting the planning done.
- Making and/or preserving wealth.
- Avoiding common financial mistakes.
Types of risk?
- Mortality and morbidity risk - might mean loss of earnings and higher expenditure.
- Unemployment risk - State benefits provide cushion but inadequate for most clients and so they need to build up a rainy day fund and/or take out unemployment cover.
- Relationship breakdown - pre-nuptial or agreement if not married.
- Litigation - consider legal expenses as part of household insurance.
- Loss of income - ensure adequate cover.
What is systematic risk?
Fall in returns due to a stock market fall.
What is non-systematic risk?
Fall in returns of individual investment due to an event that only impacts that particular investment.
What is inflation risk?
Value of returns and underlying capital eroded over time by rising prices.
What is interest rate risk?
Moving against the investor, e.g. down for those in variable accounts, up for those in fixed.
What is political/regulatory risk?
Governments and regulators change policy resulting in lower returns (e.g. a reduction in the dividend allowance - taxation risk)
Credit Risk
What is default risk and downgrade risk?
Credit rating agency states it thinks a fixed interest investment will default or downgrade it - its value will fall.
Credit Risk
What is counterpart risk?
The risk a party to a contract will default on their obligations.
Credit Risk
What is bail-in risk?
The risk an investor may be ask to provide financial help to the organisation they have invested in.
What is currency risk?
Moving against the investor, reducing returns once converted into GBP.
What is liquidity risk?
Being unable to sell an investment at an acceptable price within an acceptable timescale.
What is pound cost averaging?
Regular monthly payments buy more units when prices fall, reduces
volatility, preserves liquidity (rather than invest lump sum in one go).
What is the risk premium?
The amount investors require above the rate they can obtain in a safe investment in order to persuade them to invest in a riskier one.
Financial investment planning helps investors with medium to long-term goals by helping them?
o Think rationally about their investments o Understand their attitude to risk
o Construct long-term asset allocations
o Have realistic goals
o Monitor progress
Risk Profiling
• Should take account of client’s aims, resources and ability to tolerate loss
• Risk and return are generally positively correlated
• Need to understand:
o Client’s aims and resources available
o Client’s objectives and ability to tolerate loss
• Planner should recommend spread of asset classes, then funds and tax wrappers
Objective Factors
• Timescale, income and asset position
• Risk capacity - the amount someone can afford to lose without endangering their financial objectives
Subjective Factors
• Attitudes and aims