Topic 14 Flashcards
Describe the importance of ethics and appropriate financial advice
- Regulatory frame work and legal duties- This involves contract law and agency law which states that agencies will have to work in favour of the client other than their own personal gain which will grant them the best option stopping the exploitation of clients. Along with data and client protections which help to keep their clients situation and data protected from being misused by organisations for further gain. This is all looked over and regulated by the FCA which set new financial standards and limits through regulation in order to provide transparency, fairness and suitability.
- Understanding client life stages- This is cruicial in giving advice tailored to their needs at their point in time. The advisor must be able to understand the goals such as saving for a first home, funding eductaion or saving for retirement in order to pick and advise the best tools and plans to get the best out of what is given.]
3.building trust- This can be done by showing empathy and emtion towards the clients life and financial situation in order to build better relations as well as being able to come from a greater understanding of what is the best outcome for them. Confidenciality is also key to keep their life and financial situation private.
Name the financial life cycles and their needs
Children (school age) - At this age financial habits should be introduced through gifts and pocket money to show savings. Could have junior ISAs or premium bonds under their name or stakeholder shares/pension with the help of relatives.
Teenagers and students (16-20) - At this age personal saving accounts and credit for larger purchases such as a car should be looked at as well as higher education funds. This stage can see student banking options or overdrafts with favourable rates as well loans tailored to young borrowers maybe ISAs as well or pension funds for long term growth.
Young adult (20-30) - At this stage financial needs mostly look at income protection, loans for housing or weddings and early stage retirement. What would be suitable is a pension plan along with income protection insurance and long term loans for the major milestones or short term loans for short term goals.
Young families (30-40) - At this stage financial needs are insurance for income protection and life insurance in case of illness or unemployment for dependants and pension savings. The suitable financial tools would be to pay into pension plans as well as life insurance maybe look into larger or re-mortgages to accommodate for larger family.
Established families (40-50) - This age and stage would see more investment into comprehensive pension plans as well as investment vehicles and protection for financial commitments such as mortgages. What would be suitable is surplus income to be invested into a diverse selection of investments as well as a great insurance and pension plan to cover any financial strain in the event of a tragedy.
Mature household (50-60) - This stage is very similar the one before but more investment is needed with planning for inheritance as well in order to cover their costs and benefit their inheritors. The best way would still be to have great portfolio of investments as well as a pension plan with easy options of liquidation if ever needed.
Retirement (60+) - In this stage a steady flow of income from insurance or investments is essential as well as the smooth transition of estate and capital through inheritance as well as long term health insurance. This can be achieved through having great long term health insurance as well as comprehensive pension plan and investments.
Name the saving and investment patterns
Early savings - This is the need for financial stability with the need for liquidity and access to funds in case of emergencies. The tools used at this stage are usually saving/current accounts.
intermediate investment - This stage is usually financial stability grows and higher returns are sort after therefore fixed term savings accounts can be looked into and utilised.
High risk investments - This is where financial stability is exceeded as there is a surplus which can be invested in investment vehicles such as stocks and bonds for much greater returns but this will also depend on the market volatility.
What is fact find and the purpose of it
Fact find is the analysis on a client in order to understand them further as well as choosing the right financial plan for their needs. This starts by collecting data on the client such as the financial situation that they are, the goals that are wanting to be achieved and the personality such as risk tolerance and investment preferences.
This information is all stored in a data base about the client which can be accessed to ensure transparency and compliance with regulatory laws.
Then a fee is discussed before anything to ensure transparency with the client with no hidden costs.
Name the key personal information needed and why
Basic information is needed for clients in order to gain a better understanding of their life cycle as well as their financial information in order to give the best advise.
full name would be needed for documentation and use in financial documentation. the date of birth and place of birth are also needed as date would give the cycle of their financial life and place would give domicile so tax and other benefits or commitments need to be calculated.
The relationship status would also need to be looked at as this can affect goals and the financial situation as some couples are happy to keep their accounts separate while some would prefer to combine all the assets and plan for the future together.
Next the dependants are also looked at as these are essential costs and planning is needed such as life insurance of saving for education for children or disability insurance and allowance for parents looked after.
Finally potential beneficiaries and donors are looked at to see where financial help in the future either through gov help or inheritance can be added to the equation.
(This data can also give referral opportunities for new clients.)
What is robo advise
This is just the use of automated advise and algorithms to give advice to those seeking it without the human interaction at lower cost as it skips the consultations and it is also convenient as it is available 24/7.
It was once constricted to just giving investment advice however it has no expanded into loan management and advice and saving and insurance. With technology increasing in knowledge and ability day by day this can change again.
Some companies do offer services with hybrid roles as the robo advice will be there but also the option of having human interaction in greater risk taking action or complicated issues needing explanation.
The FCA makes sure that the advice given by the bots must meet the same standards as human interaction to keep it concistant.
Name and describe financial situations
Employment status - This is important as the client needs to be understood as either employed, unemployed, self employed or retired. This will allow the advisor to know if irregular payments are expected through self employment or if they are retired which will focus on generating income and a steady flow.
Income and benefits -This is important to understand the breakdown of where the guaranteed and addition income can be seen e.g. bonuses, commission, overtime ect. This will also help employer benefits like pensions or insurance to plan better.
Income and expenditure analysis - The analysis of income through investments salaries, pension and more compared to the expenditure which is fixed e.g. rent, car payments, bills and those which are variable e.g. hobbies, vacation, dining ect which is harder to quantify.
Assets and Liabilities- The assets that are looked at are property and investments which may be of value or increasing as well as for tax purposes where as liabilities which are secured or unsecured such as a mortgage and a credit card loan are also looked at to show what to prioritise in repayments and what is causing the most damage to assets and capital.
What are soft facts and open ended questions and how they can be used
Soft facts are questions such as how prepared are ypu financially for an unexpected event or what are your financial goals for the next 5-10 years.
This type of questioning gives advisors understanding to their motivation levels so they can plan what type of tools to use and what priorities should be focused on to achieve these goals as well as a better understanding for willingness and understanding of alternatives which could be used to save or invest and also addresses any issues which are surface level such as with a gap in knowledge.
what is risk tolerance and the assessments to better understand clients stance
Risk tolerance is the attitude of the client towards their investments and financial goals to then better understand what tools would be suitable for them. The clients are usually assessed with questions such as ‘how would you feel towards a 10% dip in your investment if within 5 years it could exceed this’ or ‘what are your thoughts on your retirement exceeding inflation but will have fluctuations yearly’.
These questions can categorise clients into conservative, balanced or aggressive in their risk tolerance which can then be guided towards bonds if on the lower end and equities if they are on the higher more aggressive side.
Describe risk tolerance and capacity for loss
Risk tolerance as seen before is the attitude which a client may have towards having riskier investments which are less stable compared to those which are traditionally more stable for example a bond. They are categorised using psychological questions and assessments which can gauge their understanding and their willingness. The financial situation of the client is then assessed as a young client with long term goals may have a higher tolerance to risk compared to a retiree, however if the risk which is associated with the investment is greater than the financial situations leading to essentials and needs to be compromised then the advisor must educate the client as well as devise a plan which is better suited to the client, that is called capacity for loss.
The advisors has the duty to educate while also juggling the clients wants and needs to then calculate the best plan for the client which they will feel comfortable in using and implementing. The advisors must also suggest the funds which align with the ethics and moral values of the client and in what is seen as ethical.
What needs and objectives need to be identified along with typical oversights that the client might have
Basic financial needs can be broad in nature as there are many which need to be addressed. The first being basic living expenses such as debts e.g. mortgage and living expenses such as food holidays ect. Then investments and savings need to addressed to enhance the funds which are there for the long term and short term. Retirement plans need to be discussed with having a sufficient plan to cover all living expenses and a steady rate of income. Tax planning also needs to be discussed where what is essential to be paid get paid and any exemptions and any benefits are used.Finally estate planning which is the most optimal distribution with the least amount of taxes.
The typical oversights for clients usually consist of weak life insurance which will only cover below the basics such as the mortgage but not the daily expenses. Another is Tax where high tax payers do not utilise the benefits of lower taxes through ISAs which will minimise capital which could be used in other areas. Clients will also usually fall victim to over reliance on cash sums which will be sitting in savings accounts and will not be able to hold its purchasing power and finally pension plans are not sufficient for the clients as they are weak barely keeping with inflation which will not cover expenses when in retirement.
How are vulnerable clients treated
Clients could be vulnerable through many ways such as financial illiteracy, disability, unemployment ect. The advisor must identify if the vulnerability is short or long term for example job loss would be short term where as a disability will be long term. Therefore the advisor must take more time in discussion and understanding the plans which are presented to clients using simple language and emotion to enable the client is understood and their needs are met with an understanding of what the plan is for them along with regular updates.
what are the key considerations when recommending solutions
The considerations which must be looked at are state benefits which are utilised to their maximum benefit in order to lower financial burdens and to not include things which are already covered, tax efficiency should be looked at in order to maximise the usable income for the client with the use of ISAs and other tax reliefs. The new plan must be comprehensive and complement the current plan along with being flexible enough to change and adapt to changes in financial goals and market volatility. The new plan must also be affordable to the client without financial burdens which will cause stress and cause harm to health. Finally it must align with the risk attitude of the client.
While presenting the recommendation the advisor must be present sufficient reasoning to their recommendations and give the clients confidence in the ideas as well as a greater understanding to avoid stress and confusion.
How must the advisors handle priorities
The advisor must discuss with the client what their essential goals are and what do they prioritise such as a young couple which would hold more value in income protection over retirement planning. The advisor must also show the risks associated with their priorities and things they may have missed or over looked. This will extend to neglect as clients might disagree on the increase on life insurance however the advisor must stress the importance and share expertise to give a greater understanding of their situations.
How must advisors act after sales in order to care for clients
They must schedule regular reviews in order to keep the plan up to date and give better understandings or adjust the plan due to market volatility. They must also have reactive actions for the clients which are after events such as a death claim or unemployment to make sure the clients stay on track and are comfortable with their finances, this is why it is essential to have great records which are detail in order to give the best analysis and update to plans without a tedious process. Advisors must also keep up to date with regulatory retention in order to renew policies and insurances or to gain greater deals.
