Topic 14

Question 1

What is crucial for providing appropriate, ethical financial advice?

Answer 1

Providing appropriate, ethical financial advice requires product knowledge, an understanding of regulatory and legal duties (such as contract law, data protection, and consumer protection), and knowledge of the advice process.

Question 2

Why is understanding the client’s life stage important in financial advice?

Answer 2

Understanding a client’s life stage helps identify their typical financial needs, allowing the adviser to recommend relevant products and build trust with the client.

Question 3

What financial products are commonly used for children’s savings?

Answer 3

Common products include NS&I products (like Premium Bonds) and building society accounts, with savings often made by relatives on the child’s behalf. Stakeholder pensions can also be opened for children from birth.

Question 4

What financial needs do students (16-20) typically have?

Answer 4

Students often have limited income but may borrow to purchase a car, fund a holiday, or finance their education through special borrowing schemes.

Question 5

What financial priorities do young adults in employment (20-30) typically have?

Answer 5

Young adults focus on saving to move out of the family home (for renting or buying a property), and although pension provision is important, many do not prioritise it.

Question 6

What financial challenges do young families (30-40) typically face?

Answer 6

Young families often face increased borrowing for a mortgage, reduced income if one partner stays home with children, or higher expenses for childcare. There is usually limited scope for saving at this stage, but income protection becomes crucial.

Question 7

What financial changes are common for established families (40-50)?

Answer 7

As children grow up, families may experience reduced childcare costs and increased income if both parents work. They may upgrade to a larger property, increase borrowing, and possibly inherit wealth.

Question 8

What financial priorities do mature households (50-60) have?

Answer 8

Mature households often have the highest earning potential, with decreased outgoings as children leave home and mortgages are paid off. Pension provision becomes a priority, with planning for retirement.

Question 9

What financial considerations are important at retirement (60+)?

Answer 9

At retirement, the focus shifts to producing income from capital, managing inheritance tax liabilities, and preparing for healthcare and long-term care costs in old age.

Question 10

How do savers’ attitudes to liquidity and safety change as their income and savings grow?

Answer 10

As income and savings grow, savers typically move from valuing liquidity and safety to accepting greater risk in exchange for higher potential returns.

Question 11

What is the first stage in the saving pattern?

Answer 11

The first stage is cash, followed by a current account with a debit card, which is almost as liquid as cash.

Question 12

After meeting their cash requirements, where do savers typically invest next?

Answer 12

Savers typically move to secure, short-term investments such as instant access or short-notice bank and building society deposits.

Question 13

What investment products do savers look at once they have sufficient short-term savings?

Answer 13

With sufficient savings, investors often move to products that offer less flexibility but higher returns, such as fixed-term bonds.

Question 14

What types of investments do individuals consider as they seek greater long-term potential?

Answer 14

Individuals may be attracted to equity-linked investments, such as shares and unit trusts, which offer greater long-term potential but come with the risk of short-term losses.

Question 15

How does the pattern apply to the choice of bank accounts and insurance products?

Answer 15

People generally start with basic accounts like a personal current account (often out of necessity) and compulsory insurance products, such as motor or travel insurance, before expanding to other financial products as their financial situation improves.

Question 16

What is the typical beginning for borrowing, and why?

Answer 16

Many people begin with short-term unsecured borrowing, such as credit cards or personal loans, to pay for things like holidays or a car.

Question 17

What is the purpose of a factfind?

Answer 17

A factfind is used by advisers to gather personal and financial information from the client to ensure that the advice given is suitable for their circumstances, needs, objectives, and experience, in line with FCA rules (COBS 9.2.2R).

Question 18

What types of information do advisers need to obtain from clients during a factfind?

Answer 18

Advisers gather information on the client’s financial situation, existing and future needs, ability to provide for those needs, attitude towards provision, objectives, and knowledge and experience of investment (if relevant).

Question 19

What does a factfind process help to assess?

Answer 19

The factfind process helps assess the client’s circumstances, preferences, and their ability to understand and accept investment risks.

Question 20

What is typically disclosed and agreed upon before completing the factfind?

Answer 20

Fees for the services that the adviser intends to provide are usually disclosed and agreed upon prior to the factfind.

Question 21

How is robo-advice changing the process of financial advice?

Answer 21

Robo-advice provides automated online advice based on algorithms, offering a lower-cost, more convenient service for clients with simpler financial needs. Clients answer questions online, and the system suggests suitable options.

Question 22

What are hybrid robo-advice services?

Answer 22

Hybrid robo-advice combines technology with human interaction, offering advice that can be provided online, by phone, or in person.

Question 23

What are the FCA’s expectations for robo-advice services?

Answer 23

The FCA expects firms offering robo-advice to meet the same regulatory standards as traditional discretionary or advisory services to ensure consumer protection.

Question 24

What basic personal information is needed in the factfind?

Answer 24

Basic personal information includes full name, postal and email addresses, telephone numbers, date and place of birth, relationship status (single, married, civil partners, etc.), and family details (e.g., dependent family members, potential beneficiaries, or donors).

Question 25

Why are family details important for financial planning?

Answer 25

Family details are important because there may be family members who are or will be financially dependent on the client, the client may become a beneficiary of gifts or trusts, or wish to become a donor. Also, from a marketing perspective, referrals to family members might be possible.

Question 26

What financial information is needed to establish the client’s situation?

Answer 26

Financial information includes employment status (employed, self-employed, unemployed, retired), income and benefits (e.g., salary breakdown, commission, bonuses, benefits like medical insurance, company cars), previous or additional employment, and income and expenditure.

Question 27

What details are needed for income and expenditure analysis?

Answer 27

For income analysis, the breakdown of the client’s earnings is required (e.g., basic salary, bonuses, etc.). For expenditure, advisers need details about regular payments (e.g., rent, household bills) and less obvious expenses (e.g., food, holidays, cars).

Question 28

What asset details should an adviser collect?

Answer 28

The adviser should collect details about ownership (single or joint), purpose of the investment, type of investment (e.g., property, bank accounts, pension policies), current value and projected future value, rate of return, tax status, and institution providing the asset.

Question 29

What information is required regarding liabilities and borrowing?

Answer 29

For liabilities, the adviser needs details such as lender, amount of loan, balance outstanding, original and remaining loan term, type of loan (secured or unsecured), monthly payment, interest rate, and repayment method.

Question 30

What should clients bring to ensure accurate factfind information?

Answer 30

Clients should bring full details of their financial arrangements, including asset ownership, liabilities, and income documentation, to ensure accurate information for the factfind.

Question 31

What type of facts are collected in the first two sections of the factfind?

Answer 31

The first two sections of the factfind collect hard facts, which include tangible details such as personal and family information and the client’s financial situation.

Question 32

What are 'soft facts' in the context of a factfind?

Answer 32

'Soft facts' refer to more intangible aspects, such as the client's feelings, motivations, and objectives. These are gathered to understand why the client has certain financial arrangements, their goals, and how they feel about their situation.

Question 33

What kinds of questions should advisers ask to understand the client's plans and objectives?

Answer 33

Advisers should ask questions like: What are your plans for retirement? What provisions have you currently got in place? What savings goals do you have? How would your partner manage financially in the event of your death? How do you feel about current levels of performance from your investments? What are your views about making financial gifts to your family?

Question 34

How can knowing the client's feelings about their financial situation help the adviser?

Answer 34

Understanding the client’s feelings helps in several ways: It uncovers the reasons behind their existing arrangements, which shows their level of understanding of finances. It helps determine the client’s motivation to improve their situation and the likelihood of them taking action. It assists in developing acceptable recommendations by understanding their views on alternative solutions.

Question 35

What types of questions should be asked to understand how the client feels about improving their financial situation?

Answer 35

To assess the client’s feelings about improving their financial situation, questions like the following should be asked: How would your partner manage financially in the event of your death? How do you feel about the current levels of performance from your investments? What are your views about making financial gifts to your family? If accident or illness prevented you from working for a period, how would that impact your financial plans?

Question 36

Why is it important to establish the client's attitude to risk?

Answer 36

It is crucial to establish the client’s attitude to risk to ensure that the client understands the risks involved in a proposal and that the recommendation aligns with their risk tolerance.

Question 37

How can an adviser assess the client’s attitude to risk?

Answer 37

An adviser can assess the client’s attitude to risk through psychometric testing, such as an online questionnaire, that determines the client’s risk tolerance. The results are used to allocate a risk score based on the client’s answers.

Question 38

What is the significance of understanding a client’s ‘capacity for loss’?

Answer 38

A client’s ‘capacity for loss’ refers to their ability to absorb falls in the value of their investments. If a loss of capital would significantly impact the client's standard of living, this should be considered when assessing their risk tolerance.

Question 39

What role does an adviser have in helping a client with their preferences?

Answer 39

An adviser has a duty of care, which involves recognizing that a client may not fully understand what they ought to do financially. In such cases, the adviser has an educational role, helping the client explore their financial situation and make informed decisions.

Question 40

Why might it be important to understand a client’s sustainability preferences?

Answer 40

As environmental considerations become increasingly important, it is necessary to know if a client is interested in investing in environmentally sustainable products. This helps tailor recommendations to their values and preferences.

Question 41

Why is it important for advisers to be aware of a broad range of financial needs?

Answer 41

Advisers need to be aware of a wide range of financial needs because clients often have multiple needs, even if they approach the adviser with a specific concern. Recognising these needs, even when clients are unaware of them, ensures the most appropriate advice is given.

Question 42

How does the FCA define a vulnerable customer?

Answer 42

The FCA defines a vulnerable customer as someone who is especially susceptible to detriment due to their personal circumstances, such as physical or mental disability, poor health, weak numeracy or literacy skills, or temporary issues like job loss, bereavement, or recent release from prison.

Question 43

What is the adviser’s responsibility when dealing with vulnerable customers?

Answer 43

The adviser must identify and appropriately handle vulnerable customers, ensuring their service provision and communication are tailored to meet the specific needs of each vulnerable customer.

Question 44

What are the five areas of financial need an adviser should focus on?

Answer 44

The five areas of financial need are: 1. Protecting dependants from the financial effects of loss of income or additional expenses due to premature death. 2. Protecting the self and dependants from the financial effects of losing the ability to earn income in the long term. 3. Providing a sufficient income in retirement to maintain a reasonable standard of living. 4. Increasing and/or protecting the value of money saved or invested, or increasing income from existing savings and investments. 5. Saving tax.

Question 45

What are some typical mistakes clients make that an adviser should look for?

Answer 45

Examples include: A young family relying solely on mortgage protection, which may not cover ongoing family expenses. Low life assurance premiums that may not provide adequate cover. Holding large amounts of money in low-interest accounts, missing out on better investment returns. Not making sufficient pension contributions, which could lead to dependency on state benefits.

Question 46

What role does the adviser play in defining a client’s needs and objectives?

Answer 46

The adviser’s role is to accurately define the client’s needs and objectives, help the client understand the key issues they face, and recommend a priority order for action.

Question 47

Why is it important to establish a priority order with the client?

Answer 47

Establishing a priority order ensures that the client does not ignore the adviser’s recommendations. Since the client’s priorities may differ from the adviser’s, it is essential to discuss and agree on the priorities rather than having them dictated by one party. Ultimately, the decision on the plan of action and its priorities rests with the client, assisted by the adviser’s recommendations.

Question 48

What is the adviser’s objective when recommending solutions?

Answer 48

The adviser’s objective is to put the right amount of money, in the right form, in the right hands, at the right time. This means matching solutions to the client’s needs based on a detailed understanding of their circumstances.

Question 49

What areas should advisers focus on when recommending solutions?

Answer 49

Advisers should focus on: State benefits: The nature and level of state benefits the client may be entitled to. Existing arrangements: Avoid recommending products that the client’s existing arrangements already satisfy. Affordability: Ensure that recommendations do not jeopardise the client’s current or future financial situation. Taxation: Recommendations should aim to mitigate tax without unnecessarily adding to the tax burden. Risk: Match the risk level of the recommended product with the client’s risk profile and capacity for loss. Timescale: Ensure the recommended product meets the client’s needs within a defined timescale. Flexibility: Recommendations should be flexible enough to accommodate changes in the client’s circumstances.

Question 50

What is a good approach for presenting recommendations to a client?

Answer 50

A clear plan for presenting recommendations is crucial. Explanations should include: The purpose of the product and how it addresses the client’s needs. The benefits the client will enjoy. The risks and limitations inherent in the product. Any options within the product that may be appropriate. A summary of reasons why the product is being recommended.

Question 51

What is involved in a features and benefits analysis?

Answer 51

A features and benefits analysis involves going through the product’s features and explaining in simple terms how each feature benefits the client. The adviser should check the client’s understanding, possibly by asking a few questions to ensure clarity.

Question 52

What factors determine when to close a sale with a client?

Answer 52

The decision to close a sale is determined by two factors: The reaction of the client. Their understanding of the proposal.

Question 53

What does closing the sale involve?

Answer 53

Closing the sale involves asking the client if they are happy to complete the application. If the adviser completes the application form on behalf of the client, it is only permissible with the client’s permission. The client must read the form thoroughly and check the details before signing it.

Question 54

How should an adviser handle objections during the sales process?

Answer 54

The adviser should first qualify the objection by finding out whether it is a genuine concern or whether it is masking another issue. For example, if the client says "that is too expensive," the adviser should determine if the real issue is the cost or if the adviser has not fully explained the benefits of the recommendation.

Question 55

What is the best way to clarify an objection from the client?

Answer 55

The adviser should try to understand the objection as specifically as possible by paraphrasing the client's statement. For example, asking, "So what you’re saying is…?" helps clarify the objection.

Question 56

What should an adviser do once they understand the objection?

Answer 56

Once the nature and importance of the objection are clear, the adviser can attempt to resolve the issue. If the objection is due to misunderstanding, the adviser should clarify it. If the issue is more specific and the client is unwilling to move, the adviser should put the obstacle into perspective and highlight compensating factors.

Question 57

Why is it important to make the client aware of misrepresentation?

Answer 57

The client must be made aware that deliberate or reckless misrepresentation could make the contract void, meaning they would not be protected and could incur a loss of premiums.

Question 58

What documents must be provided to the client before closing the sale?

Answer 58

Before the sale is closed, the adviser must provide: A key features document (or key information document ‘KID’ or key investor information document ‘KIID’ depending on the product). A key features illustration (for some products). A product brochure explaining the product details and features in full. The cancellation notice, which explains the client’s right to withdraw within a defined period.

Question 59

What should the adviser provide the client during the meeting?

Answer 59

The adviser should provide the client with their business card, giving the client a clear route to contact them should there be any queries later on.

Question 60

What does after-sales care entail in providing a professional service?

Answer 60

After-sales care goes beyond selling a product to meet needs; it involves ensuring proper follow-up and reviews. This includes keeping the client informed during any delays in the acceptance process, managing issues like direct debits, policy delivery, cancellation notices, conducting standard reviews, and handling requests to alter the plan.

Question 61

What are the two categories of client servicing?

Answer 61

Client servicing is divided into two categories: Proactive servicing: Initiating action by contacting the client to discuss further needs, such as a salary review, job change, or taking up previously recommended actions. Reactive servicing: Responding to client requests, such as inquiries about media reports, changes in circumstances, or requests from the next of kin for death claims.

Question 62

What is proactive servicing, and how is it beneficial?

Answer 62

Proactive servicing involves initiating contact with the client to discuss their needs, even if there is no known future event. It allows the adviser to review the client’s situation, identify any changes, update records, and recommend new products or adjustments to existing ones.

Question 63

What is reactive servicing, and when does it occur?

Answer 63

Reactive servicing occurs when a client requests assistance, often after an external trigger such as a media report or a change in their circumstances. It also includes responding to situations like non-payment of premiums or handling death claims from next of kin.

Question 64

Why is maintaining clear and concise records important in client servicing?

Answer 64

Maintaining clear and concise records ensures compliance with the Financial Services and Markets Act 2000 and prepares the adviser for any eventualities. Proper records also increase the potential for more business by making it easier to manage client requests and needs.