R06 - April 2023 Flashcards
Explain the process a financial adviser should follow to establish clients aims and objectives (8)
- 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
An investment policy statement should sum up the investment strategy by setting out (6)
- Purpose of investment
- Income or growth objective
- Timescale
- Statement about risk profile(s)
- Statement about asset allocation
- Other issues such as ethical investment
Benefits & drawbacks of paying adviser fees for initial/ongoing service
Hourly, Fund Based & Fixed Fee (4 Each)
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?
Key information needed when building lifetime cashflow model (12)
- 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
Limitations of cash flow modeling & why you shouldn’t solely rely on outcome (9)
- 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
What is meant by the term ‘risk profile’? (3)
- 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
Why should an adviser not solely rely on computer based risk profiling to confirm a clients ATR? (6)
- 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
Main factors that might influence a clients ATR (10)
- 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)
What does an adviser need to take into account when understanding risk assessment with a client? (3)
- Risk tolerance, willingness to accept fluctuations
- Risk perception, personal oppinion on risk associated (knowledge and experience)
- Risk capacity, ability to absorb any loss
Protection - Term Assurance
- What does it provide? (2)
- Types? (7)
- Options? (2)
- Trust? (1)
- 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
Protection - Critical Illness
- What does it provide? (1)
- Types? (3)
- Options? (4)
- Trust? (1)
- 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
Types of term assurance & definition (7)
- 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.
Income Protection (10)
- 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
Personal Accident & Sickness Insurance (PAS) (7)
- 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.
Accident Sickness & Unemployment Insurance (ASU) (7)
- 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
Monthly payment protection insurance (MPPI) (6)
- 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
Private medical insurance (8)
- 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
Benefits & drawbacks of using IP rather than Accident, Sickness & Unemployment (5/6)
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
Explain how a salary sacrifice arrangement might work (3)
- Salary reduced by amount of pension contribution
- Employer pays into the scheme as an employer contribution
- Employer might also add NICs saved
Benefits & drawbacks of employer offering salary sacrifice (4/7)
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
Why better to make monthly contributions into pension rather than lump sum? (5)
- Pound cost averaging
- Benefit from investment volatility
- Stop and start contributions, flexibility, convenience
- Assist with budgeting
- Reduce risk of poor investment timing
How does a life styling funds work? (4)
- 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
Advantages and disadvantages of life styling funds (3/4)
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
8 Drawbacks of Balanced Life Style Fund
- 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
Limitations of AA (6)
- 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
Benefits and drawbacks of Investing in tracker funds (8/6)
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
VCT
- Invest
- Dividends
- Income tax relief
- Tax relief
- Holding period
- CGT
- Reinvestment Relief
- IHT
- 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
EIS
- Invest
- Dividends
- Income tax relief
- Tax relief
- Holding period
- CGT
- Reinvestment Relief
- IHT
- 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
SEIS
- Invest
- Dividends
- Income tax relief
- Tax relief
- Holding period
- CGT
- Reinvestment Relief
- IHT
- 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
Outline process FA should follow to provide clients with suitable advice on existing investment (9)
- 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
Difference between positive and negative screening (4/2)
- 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
Bare Trusts
- Transfer In
- IHT Free
- IHT Initial?
- Can benefit be changed?
- When can beneficiary benefit?
- Income tax
- CGT Position
- IHT Liability
- 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
Bare Trusts
- Transfer In
- IHT Free
- IHT Initial?
- Can benefit be changed?
- When can beneficiary benefit?
- Income tax
- CGT Position
- IHT Liability
- 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%).
Requirement for making valid will (7)
- Sound mind
- Clear intention to distribute property
- @ least 18
- Writing
- Signed by client
- Signed by 2 witnesses
- Witness must be present when client signs
Advantages of valid wills (4)
- Clear instruction on how to distribute estate
- Choose who is responsible for administrating estate
- Avoid intestacy rules
- Make specific provisions for guardianship of child
Key duties of executor of will (7)
- 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
Why wills should be regularly reviewed (4)
- 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
