Topic 8 - Variables that Establish and Restrict the Achievement of a Client's Investment Objectives

Question 1

Asset Classes

What are the pros can cons of::

• Cash
• Bonds
• Property
• Equities

Answer 1

Cash

• Pros - Safe and Easily Accessible
• Cons - Inflation Eroded

Less certainty about how long bank can hold funds to carry out intermediation. Longer notice period means higher interest.

Bonds

• Pros - Low risk and allows for certianty of cash flows
• Cons - Susceptible to interest rate rises. Inversely priced

Normally terms of 5 years +. Bond is loan for fixed interest followed by lump sum payment of invested capital.

Allows governments and corporates to issue debt instruments to raise capital that finances projects.

Property

• Pros - Inflation Proof income, capital growth, diversification, better average returns over cash and bonds,
• Cons - Illiquid, vulnerable to economic conditions, risk of rental voids, potentially high costs

Equity

• Pros - Potentially highest return, potential for inflation proofing through capital growth and dividends.
• Cons - Highest Risk as all capital at risk but can mitigate through diversification, no guarantees

Question 2

What are the six steps of the International Standard ISO 22222:2005 process of providing investment advice?

What is it’s objective?

Answer 2

Data, theories and analysis shows scientific form of advice and the balancing of financial and emotional needs of clients and their changing circumstances shows the art form of advice.

International Standard ISO 22222:2005 Process:

1. Gather client data and goals
2. Analyse financial status
3. Present financial plan
4. Implement financial plan
5. Monitor financial plan
6. Establish relationship

Objective is achieving and promotion consumer confidence by providing benchmark for high global standard of personal finance service.

“BS ISO 22222 specifies requirements and provides a framework for ethical behaviour, competences and experience of personal finance planner.

Question 3

What is a hard fact and soft fact?

Answer 3

Hard fact = Measureable information or data.

Soft fact = Value, belief, opinion or feeling

Question 4

What things should an adviser consider when looking at thes uitability of a portfolio’s asset allocation structure?

Answer 4

• Underlying holdings/asset allocation;
• Geographical exposure;
• Sector exposure;
• Blend of assets, risk and correlation;
• Potential for growth/income.

Question 5

As part of the FSA (2011) Finalised guidance on assessing suitability - what guidance was issued around attitude to risk?

Answer 5

• Firm should have robust structure for assessing risk that includes their capacity for loss.
• Robust and flexible process for investment selection that tkaes into account objectives, knowledge, expeirence and circumstances.
• Where suited to putting money in cash deposits, this should be identified.
• Tools should be fit for purpose and limitations recognisd and mitigated. Answers interpreted appropriately without corrupting outcome.
• Questions, answers & descriptions are clear, fair and not misleading.
• Firms should understand nature and risks of products selected.

Question 6

What are the six fair treatement customer outcomes?

Answer 6

1. Consumers confident they’re dealing with firmst where fair treatement is central toculture.
2. Retail Products/services designed to meet needs of certain group & targeted accordingly.
3. Consumers provided with clear info and kept informed before, during & after sale.
4. If advice given, it is suitable and takes account of consumer’s circumstances
5. Consumers provided with proucts and services that perform as firm has led them to expect
6. Consumers do not face unreasonable post-sale barriers to change product, provider, make a claim or complaint