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R06 - April 2023 > R06 - April 2023 > Flashcards

R06 - April 2023 Flashcards

1
Q

Explain the process a financial adviser should follow to establish clients aims and objectives (8)

A
  • Discover needs & objectives
  • Help clients understand needs & objectives
  • Ask open and closed questions to obtain hard & soft facts
  • Identify the term of objectives (short, medium, long)
  • Establish views on family and dependents
  • Establish timescales
  • Priorities objectives whilst making sure achievable
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2
Q

An investment policy statement should sum up the investment strategy by setting out (6)

A
  • Purpose of investment
  • Income or growth objective
  • Timescale
  • Statement about risk profile(s)
  • Statement about asset allocation
  • Other issues such as ethical investment
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3
Q

Benefits & drawbacks of paying adviser fees for initial/ongoing service
Hourly, Fund Based & Fixed Fee (4 Each)

A

Hourly
Advantages
- Similar to other professions
- Easy to understand and compare
- Based on actual work (investment amount irrelevant)
- Fee cap may apply
Disadvantages
- Adviser may take longer to increase remuneration
- May put clients off contacting
- Paid from personal funds
- Unknown total cost

Fund Based Fee
Advantages
- Negotiate lower fee for higher investment
- Payment via provider if not personal funds
- Incentive for advisers to grow funds
- Attractive for low investments
Disadvantages
- Difficult to predict per annum
- May not reflect time spent
- Extra charges for other services
- Less potential for investment growth

Fixed Fee Basis
Advantages
- Familiar to other professions
- Known cost
- Easy to understand and compare
- Amount invested irrelevant, cheaper for higher sum inv
Disadvantages
- Is fee justifiable?
- Paid from personal funds
- May put customer of contacting for advice
- What is included?

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4
Q

Key information needed when building lifetime cashflow model (12)

A
  • Current & Future Income Needs
  • Planned Capital Expenditure
  • Any inheritance or gifts expected?
  • Current assets, income and guaranteed income
  • Growth rate assumptions
  • Interest rate assumptions
  • Product charges
  • Inflation assumption
  • ATR/CFL
  • Life expectancy
  • Market conditions
  • Impact of death on either client
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5
Q

Limitations of cash flow modeling & why you shouldn’t solely rely on outcome (9)

A
  • Snapshot of current situation
  • Inflation assumption may be incorrect
  • Growth assumption may not be achieved
  • Personal circumstances may change (health, income, obj)
  • Tax rules change
  • ATR/CFL change
  • Charges change
  • Needs to be updated regularly
  • Input error or misunderstanding of info
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6
Q

What is meant by the term ‘risk profile’? (3)

A
  • Level of volatility a client is prepared to accept
  • holding investments higher than risk profile may result in unacceptable losses in poor market conditions
  • holding investment lower than risk profile may result in missing out on higher returns
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7
Q

Why should an adviser not solely rely on computer based risk profiling to confirm a clients ATR? (6)

A
  • Different results would require further discussion
  • Different programs produce different results
  • Clients may not be able to relate to contents of the questionnaire
  • Potential for clients to misunderstand the question
  • Unsuitable if zero CFL
  • May have different risk profiles for different objectives
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8
Q

Main factors that might influence a clients ATR (10)

A
  • Timescale
  • Income/Expenditure/Affordability/Disposable Income
  • Assets/Investments/Level of Wealth
  • Liabilities
  • Investment amount
  • Age
  • Experience and understanding of markets and investments
  • Health
  • Objectives (Income or growth)
  • Change in personal circumstances (marriage, death, job change)
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9
Q

What does an adviser need to take into account when understanding risk assessment with a client? (3)

A
  • Risk tolerance, willingness to accept fluctuations
  • Risk perception, personal oppinion on risk associated (knowledge and experience)
  • Risk capacity, ability to absorb any loss
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10
Q

Protection - Term Assurance
- What does it provide? (2)
- Types? (7)
- Options? (2)
- Trust? (1)

A
  • Tax free lump sum on death during term
  • Usually includes terminal illness benefit
  • Level, Increasing, Decreasing, Renewable, Increasable, Term 100, Convertible
  • Waiver of premium
  • Can included CIC
  • Yes
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11
Q

Protection - Critical Illness
- What does it provide? (1)
- Types? (3)
- Options? (4)
- Trust? (1)

A
  • Tax free lump sum on diagnosis with a critical illness after survival period (up to 30 days)
  • Stand alone or combined with life assurance
  • Free child cover
  • Reviewable (5/10/Guranteed)
  • Sum indexed
  • Waiver of premium
  • Life cover buy back
  • Split benefit trust
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12
Q

Types of term assurance & definition (7)

A
  • Level = fixed
  • Increasing = fixed % or index linked
  • Term 100 = written to age 100 (alt to WOL)
  • Decreasing = decrease in predetermined way (mortgage, inter vivos, family income ben)
  • Increasable = Increased without underwriting
  • Renewable = usually 5 year term, can renew policy without underwriting, premium likely higher as based on new age.
  • Convertible = can be converted to WOL or endowment with same or less sum assured without underwriting. Premium based on age @ conversion.
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13
Q

Income Protection (10)

A
  • Regular tax free income should you be unable to work due to sickness or ill health.
  • Deferred period is 4,13,26,52,104 weeks
  • Paid until return to work, die, retire or policy ends
  • Rehabilitation benefit (proportion of benefit if return part time)
  • Proportion of benefit if return to work on less pay
  • No limit
  • Benefit is 50-65% pre claim income
  • Own occupation or any occupation
  • Guarantee or reviewable premium
  • Automatic waiver of premium
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14
Q

Personal Accident & Sickness Insurance (PAS) (7)

A
  • Tax free income
  • Benefit limited to set % of earnings
  • Usually annual contract, can be less (insurer can cancel)
  • Shorter deferred period buy only pays for 1-2 years
  • Standalone or bolt on to house, car or travel insurance
  • Refund medical expenses
  • Lump sum for loss of limb or sight etc.
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15
Q

Accident Sickness & Unemployment Insurance (ASU) (7)

A
  • Tax free income
  • Annual but can be less, insurer can cancel
  • Max benefit period is 2 years
  • Deferred Period
  • Pre-existing conditions excluded
  • % of earnings, monthly maximum amount
  • Possible lump sum for loss of limb or sight etc
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16
Q

Monthly payment protection insurance (MPPI) (6)

A
  • Accident, Sickness or Involuntary Unemployment
  • Benefit @ least 6m, usually 1 or 2 years
  • Deferred period often 30-180 days
  • Must cover self-employed
  • MPII can’t be sold @ same time as mortgage
  • Minimum standard set by ABI or CML
17
Q

Private medical insurance (8)

A
  • Private treatment (consult, investigation, accommodation)
  • Only claim back expenses
  • Acute conditions (not chronical)
  • May need to pay excess or co-payment
  • Basic plan usually restricted to accommodation, drugs, dressings & doctors fees
  • Mid range covers longer claim period and higher limits
  • Comprehensive have longer claim period, higher limit & wider choice of hospitals. Home nursing and private ambulances usually covered. May include alternative medicine and dental, can cover family not just individual.
  • Benefit in kind if premium paid by employer
18
Q

Benefits & drawbacks of using IP rather than Accident, Sickness & Unemployment (5/6)

A

Benefits
- Can’t be cancelled by insurer, can claim more than once
- Longer policy period
- Own occupation available
- Indexation
- Can include proportional and rehabilitation benefit
- Guaranteed premium

Drawbacks
- Usually higher cost
- Longer deferred period
- Doesn’t cover unemployment
- No lump sum or cover on death
- Stricter underwriting

19
Q

Explain how a salary sacrifice arrangement might work (3)

A
  • Salary reduced by amount of pension contribution
  • Employer pays into the scheme as an employer contribution
  • Employer might also add NICs saved
20
Q

Benefits & drawbacks of employer offering salary sacrifice (4/7)

A

Benefits
- Reduce NICs
- Increase pension benefits without affecting net pay
- Employer may invest saved NICs
- Can help retain personal allowance and saving income tax

Drawbacks
- Salary reduction may affect borrowing
- Max benefit on IP may be lower
- Arrangement can’t be binding on employer
- May impact future salary increases
- May reduce employee benefits e.g. death in service
- Impact entitlement to state benefits
- Extra paperwork and admin

21
Q

Why better to make monthly contributions into pension rather than lump sum? (5)

A
  • Pound cost averaging
  • Benefit from investment volatility
  • Stop and start contributions, flexibility, convenience
  • Assist with budgeting
  • Reduce risk of poor investment timing
22
Q

How does a life styling funds work? (4)

A
  • Investment mix of a pension fund is auto moved away from equities into fixed interest and cash as retirement approaches
  • Assumption used for max PCLS and annuity purchase
  • Investment risk @ selected retirement usually 75% gilts, 25% cash
  • Switch happens 5-10 years before selected retirement date
23
Q

Advantages and disadvantages of life styling funds (3/4)

A

Advantages
- Gains locked in to reduce risk of fund as retirement approaches
- Including gilts provides hedge against falling annuity rates
- Switching automatic so no need to remember to switch

Disadvantages
- Assumes full PCLS and annuity @ selected retirement age
- If retire early, fund may be exposed to equity when annuity purchase and if value has fallen, reduced fund
- Switch automatic, doesn’t cater for market conditions
- If retire later than expected retirement age, to much in FI with reduced growth opportunities

24
Q

8 Drawbacks of Balanced Life Style Fund

A
  • May not retire at selected retirement age
  • Market timing may not be suitable
  • Loss of potential growth
  • No equity investment at selected retirement age
  • May not suit ATR
  • Assumes annuity purchase
  • Not suitable for drawdown
  • Unable to switch between funds as automatically occurs as pre determined time or AA
25
Q

Limitations of AA (6)

A
  • Doesn’t recommend tax wrappers or take into account tax position
  • Charges not considered
  • Questions asked aren’t always relevant
  • Different models = different results
  • Based on historic data
  • Needs to be reviewed
26
Q

Benefits and drawbacks of Investing in tracker funds (8/6)

A

Benefits
- Low costs
- Computer system
- Potential for growth
- Perform in line with index
- Geographical diversification
- Liquid
- Easy to follow performance and understand
- Active managers don’t always outperform
Drawbacks
- Under perform market due to charges
- Tracking error
- Perform poorly in falling market
- No active management
- Currency risk due to global index trackers
- Lack of control over underlying assets

27
Q

VCT
- Invest
- Dividends
- Income tax relief
- Tax relief
- Holding period
- CGT
- Reinvestment Relief
- IHT

A
  • 80% In unquoted companies
  • Max 15% in 1 company
  • Exempt from income tax from VCT investment up to £200K
  • 30% on first £200K
  • Tax reducer, can’t exceed tax paid
  • 5 year
  • No CGT
  • No Reinvestment Relief
  • Forms part of estate as normal
28
Q

EIS
- Invest
- Dividends
- Income tax relief
- Tax relief
- Holding period
- CGT
- Reinvestment Relief
- IHT

A
  • Unquoted trading company
  • Liable to income tax
  • 30% up to £2m
  • Tax reducer, can’t exceed tax paid
  • 3 year
  • Free from CGT after 3 years
  • Reinvestment Relief
  • 100% business relief after 2 years
29
Q

SEIS
- Invest
- Dividends
- Income tax relief
- Tax relief
- Holding period
- CGT
- Reinvestment Relief
- IHT

A
  • Help small unquote companies start up and raise finance
  • Liable to income tax
  • 50% on £100K
  • Tax reducer, can’t exceed tax paid
  • 3 year
  • Free from CGT after 3 years
  • Reinvestment Relief (50% exempt of investment amount)
  • 100% business relief after 2 years
30
Q

Outline process FA should follow to provide clients with suitable advice on existing investment (9)

A
  • Disclose status / fee / client agreement
  • Factfinding / goals / objectives
  • ATR / CFL
  • Analysis of current situation / affordability
  • Undertake research
  • Formulate recommendation
  • Make presentation / recommend
  • Implement / suitability letter
  • Annual review / monitor
31
Q

Difference between positive and negative screening (4/2)

A
  • Invest in company makes positive contribution to society
  • Invest in company that demonstrates better business practice
  • May be element of negative screening, companies in certain industries e.g. arms
  • Committee may have to be consulted before fund manager can make particular investment
32
Q

Bare Trusts
- Transfer In
- IHT Free
- IHT Initial?
- Can benefit be changed?
- When can beneficiary benefit?
- Income tax
- CGT Position
- IHT Liability

A
  • PET
  • After 7 years
  • No
  • No
  • Beneficiaries can demand @ 18
  • Taxed on beneficiary
  • Taxed on beneficiary using rates and full allowance
  • Liability on settlor if death within 7 years of PET
  • Trust fund forms part of estate if beneficiary dies
33
Q

Bare Trusts
- Transfer In
- IHT Free
- IHT Initial?
- Can benefit be changed?
- When can beneficiary benefit?
- Income tax
- CGT Position
- IHT Liability

A
  • CLT
  • After 7 years
  • Only if higher than NRB, 20% trustee pays, 25% settlor
  • Yes, trustees have discretion to change
  • Trustees have control over who gets income and capital. Beneficiaries have no right to either.
  • Trust has standard £1,000. Trustees charged at rate applicable to additional rate taxpayer.
  • Trust has CGT amount of 1/2 normal amount. Split between number of trust settlors set up, min 1/5, CGT 20%
  • Outset if higher than NRB, back in estate if death in 7 years
  • Trust potential charge every 10years and when capital distribution (no more than 6%).
34
Q

Requirement for making valid will (7)

A
  • Sound mind
  • Clear intention to distribute property
  • @ least 18
  • Writing
  • Signed by client
  • Signed by 2 witnesses
  • Witness must be present when client signs
35
Q

Advantages of valid wills (4)

A
  • Clear instruction on how to distribute estate
  • Choose who is responsible for administrating estate
  • Avoid intestacy rules
  • Make specific provisions for guardianship of child
36
Q

Key duties of executor of will (7)

A
  • Administer deceased’s affairs, obtain copy of recent will
  • Obtain full details of assets / liabilities / debts
  • Complete IHT return / pay
  • Obtain / apply for probate
  • Distribute estate in accordance with will and inform beneficiaries
  • Complete income tax / CGT return
  • Prepare estates accounts
37
Q

Why wills should be regularly reviewed (4)

A
  • Ensure executors / trustees in place and can act
  • Consider changes in family, divorce, beneficiaries, grandchildren, wishes
  • Financial position may change
  • IHT planning / changes in legislation

R06 - April 2023 (4 decks)

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