1 Flashcards
(111 cards)
1
Q
Assumptions?
A
Adequately researched and justified (relevant to financial plan and clients personal situation)
Reasoned (have rationale, be evaluated, concluded and based on data).
Reasonable (realistic and fits with general consensus so both client and planner are comfortable)
Quantitative: hard facts (inflation, returns)
Qualitative: Soft facts (good health, life expectancy)
2
Q
Impediments?
A
Real: spends too much / debt outweighs assets
Perceived: Beliefs / thoughts / attitudes
3
Q
3 Consumer Duty Rules?
A
1) act in good faith towards retail customers
2) avoid foreseeable harm to retail customers
3) enable and support retail customers to pursue financial objectives.
4
Q
4 Consumer duty outcomes/obligations?
A
1) product and service outcome: meets needs, in clients best interest and appropriately governed.
2) price and value outcome: value for money, fees are justified, a reasonable relationship between price and value.
3) consumer understanding: effective communications, client understands products/services, cost/value and risk.
4) consumer support: appropriate support to ensure products and services continue to meet needs.
5
Q
4 Vulnerabilities :
A
Poor decisions > poor outcomes
1) health: serious or long term illness / mental health
2) resilience: low or erratic income / low savings / high debt
3) life events: divorce / redundancy / bereavement
4) capacity: learning difficulties / illiterate.
6
Q
Maslows hierarchy of needs:
A
1) biological/physiological: air, food, drink, shelter.
2) safety: security, order, law, stability
3) belonging/love: work, family, friends
4) esteem: achievements, lifestyle products & services
5) cognitive: knowledge and meaning
6) aesthetic: appreciation, search for beauty
7) self actualisation: personal potential / growth
8) transcendence: helping others self actualise
7
Q
Income tax Calc
A
Non savings / savings / dividends
1) calc total income (deduct salary sacrifice)
2) gross up net contributions/payments and extend basic rate band.
3) deduct personal allowance
4) calculate tax
5) consider:
- deduct mortgage interest relief
- add child benefit charge
- deduct VCT/EIS/SEIS reliefs
8
Q
Reducing investment risk:
A
1) diversification
2) correlation
3) asset allocation
9
Q
Principal property relief:
A
- Allows a reduction in CGT if property has been maintain residence.
= total gain x period of occupation in months (+ 9m if been MR) / total months of ownership
10
Q
Roll over relief:
A
- CGT deferral
- when selling business asset and then buying another business asset
- must purchase new asset 1 year before or 3 years after disposal
- allows expansion before selling existing
11
Q
Holdover relief:
A
- CGT deferral
- holds over gain to donee/trust
- no CGT at time of gift
- acquisition cost given to receiver of gift
- donor and donee must claim jointly
12
Q
Trusts: three certainties
A
1) intention - its purpose (to create a trust) - no more than 125 years
2) subject matter - trust property
3) objects - who benefits
13
Q
Trustee Act 1925
A
- the foundation of the trust law
- trustee exercise own discretion in performance of duties
- section 31: allows income to minors parent/guardian (still legislation today)
- section 32: allows advancements, if conditions met (still legislation today)
14
Q
Trustee Act 2000
A
- Duty of care & diligence
- general power of investment (any investment allowed)
15
Q
Trust case law: Saunders vs Vautier 1841
A
Bare trust: entitlement at age 18, regardless of what deed stipulates
16
Q
Trust case law: Mcphail vs Doulton 1969
A
If it can be said with certainty that any given person is or is not a member of the class of beneficiaries, the trust will not fail.
17
Q
Trust case law: Hunter vs Moss 1994
A
Most trust law suggest trust property must be segregated from non-trust property for the trust to be valid.
In this case, the property in question (shares) were intangible, so the above did not apply. As all shares were identical and the trust did not specify segregation, so trust was valid.
18
Q
Trust case law: Raithatha vs Williamson 2012
A
Under legislation, pension funds are outside of the scope for bankruptcy, but in this case the court allowed for income payment order on the pension fund that was not yet drawn on.
19
Q
Trust case law: Horton vs Henry 2014
A
Trustee in Bankruptcy attempted to access pension funds via an income payment order, but the court declined (unlike Raithatha vs Williamson 2012) as the pension rights were not yet known, until vested.
20
Q
Intestacy rules:
A
If there are children:
- spouse gets £322K as statutory amount + chattels + 50% of residual
- children get other 50% of residual, equally (access at 19 if minor)
If no children:
- all to spouse.
21
Q
Efficient frontier:
A
To achieve required returns while taking as little risk as possible.
22
Q
Sharpe Ratio:
A
- to establish the best risk adjusted return
- shows efficiency relative to peers on EF line
= (return - risk free return) / standard deviation
23
Q
5 CAPM assumptions:
A
- investors are rational
- investors are risk averse
- investor decisions are made on risk and return alone
- all investors have the same holding period
- there are no taxes or costs
24
Q
The purpose of CAPM:
A
To identify assets from the perspective of volatility associated with the market (B) and estimate what the asset should return based on SML.
25
CAPM formula:
1) market premium (ErM over and above Rf)
2) market premium x Beta of security = risk premium
3) risk premium + Rf
= expected return of security
26
Nominal return / composite return:
Nominal = actual return
Composite = weighted return for each asset added together
1) weight as fraction x return as %
2) calc for each asset
3) add together
= composite return in nominal terms
27
Real return:
After inflation return
1. (1+ composite return in nominal terms) / (1 + Inflation)
2. -1
3. X100
28
Treynor Ratio:
Risk adjusted return to compare different portfolios
= return of portfolio - risk free / beta of portfolio
29
Jensens Alpha
Risk adjusted return to show difference between achieved returns vs expected returns.
= return of portfolio - expected return (based on CAPM)
30
3 Factors to consider when assessing risk management
1) consider likelihood
2) consider magnitude (financial impact)
Options:
Self insured or insure.
31
Annual Allowance for DB:
1) beginning pension input
Years of service / type of scheme x salary
X 1.inf
2) end of period pension input
Years of service / type of scheme x salary
3) what is the difference?
4) X 16 (capitalisation factor)
= pension input for AA.
32
Key persons cover:
- normally up to 5 years term
- usually term assurance
- company owned / paid for (allowable)
Calc methods:
A) multiple of earnings (5x)
B) Payroll method: (salary / total payroll) x profits x number of expected years to recover
33
Tapered AA:
Adjusted income: £260K (taxable income + employer contributions + benefit in kind)
Threshold income: £200K (taxable income - employee contributions)
Excess over adjusted / 2 = AA reduction
60k 2023/24
40k 2022/23 to 2016/17
34
Investor policy statement (11):
- objectives
- risk profile
- liquidity needs
- time horizon
- tax position
- investment strategy
- Asset allocation
- constraints
- benchmarks
- risks
- Any other factors
35
Corporation tax:
Profits of £50k or less: 19%
£50k-250k: 26.5% (marginal relief)
£250k or more: 25%
Add all together
36
6 step Financial Planning Standards Board process:
1) establish & define relationship
2) collect client info
3) analyse and assess financial position (TVM)
4) Develop recommendations and present them
5) implement
6) review
37
State pension / NIC deficit calc:
A) how many years NIC shortfall?
B) weekly entitlement (221.20pw) x 4 x 13
C) B x 1.0inf ^ n = full SP entitlement
D) NIC years / 35 = pro rata entitlement
E) pro rata x full
38
Factors impacting attitude to risk:
- Net assets / income
- health
- timescale
39
5 ways of Financial management:
1. Get highest rates on deposit
2. Ensure FSCS protected
3. Pay of high interest debt
4. Asset ownership between spouses
5. Budget / I&E
40
6 Need areas:
- Goal setting: establish goals / what is needed
- Protection: Establish financial needs / any shortfall on death or illness & recommend cover requirements
- Investments: Risk profile, strategy, expected returns
- Taxation: Determine status & recommend mitigation strategies
- Retirement: develop goals, capital / income needs, any shortfalls, identify resources and recommend strategies for investment / taxation / drawdown.
- Estate Planning: Establish IHT position and recommend any strategies.
41
3 conflicting income demands:
1) overpaying mortgage vs saving for retirement
2) pension saving vs ISA saving
3) paying for protection vs saving for emergency
42
3 Risks of investing in bonds:
- inflation risk: reduces the value of bond (buying fewer goods and services)
- interest rate risk: increasing rates = less attractive
- default risk: issue fails to pay coupon
43
IHT exemption vs Relief
- Exemption = assets not chargeable for IHT (gifts/spousal transfers)
- Relief = chargeable assets to receive a reduction in IHT or can be passed on IHT free (QSR, BPR, APR)
44
3 Individual conduct rules:
1. Integrity, due skill, care and diligence
2. Be open with FCA, PRA and any other regulators
3. Put customers interests first, treat them fairly and manage conflicts of interest.
45
When client expectations of returns and their tolerance don’t align:
1) discuss and emphasis the relationship between risk and return
2) revise return objectives (delay, save more, spend less)
3) adjust risk (take more)
46
Potential advantages of child benefit:
1) state pension credit for years not working
2) extra income
47
Protection, needs based approach:
1) establish income & capital needs
2) deduct existing protection, capital and income
3) consider:
- funeral costs: 10k
- EF: 3-12 months expenses
- debt / mortgage
- other capital needs
- long term income needs of survivor and their ability to return to work / childcare costs
48
5 Pension benefits vs BTL
- tax benefits (income tax, CGT, IHT while in pension
- protection against creditors (in trust)
- tax relief on contributions
- lower costs (only AMC vs management, repairs, void periods)
- liquidity: TFC, DD, annuity
49
3 Planning opportunities for limited company:
- pension contributions (corp tax)
- protection: key person or relevant life
- equalise income between spouses for more tax efficiency
50
Need, objective, goal?
Need: An essential outcome / non-negotiable. High priority. Future or present.
Objective: Future outcome. Less important than need. Often with monetary value and time frame.
Goal: Personal and Emotional attachment to it. Not as pressing as a need, but a want.
51
5 Conflicts of interest?
- Financial gain / avoiding financial loss at the expense of a client (speculating with client portfolio for higher AUM)
- Has an interest in outcome of service or transaction (get more AUM)
- Has incentive to favour one client over another (preferential treatment to higher fee payer)
- two parties with different interests (couple going through a divorce)
- Incentives from 3rd parties (promotion of provider products)
52
What is involved in Financial Planning?
- Identifying GONP
- Analysing financial position
- Calculating shortfalls
- Outlining costs
- proposing solutions
Targets: Consumers or all ages.
Barrier: cost / lack of awareness
53
What is involved in Financial Advice?
Recommendations to:
Start, stop, increase, decrease, switch or maintain contributions or withdrawals from regulated products.
Target: Consumers who need financial products (protection, pensions, investments, estate planning)
54
What is involved in wealth management?
Providing investment management services, financial planning and other services to HNW clients with complex needs and substantial resources.
55
Debt to asset ratio:
= total debt / total assets
- demonstrates debt expressed as a % of net worth.
- lower = less debt / better financial position
56
Current Ratio:
= Liquid assets / short-term debt
- measures ability to repay short term debt
- 1+ indicates more short term assets than debt
57
Liquidity ratio:
= liquid assets / monthly expenditure
- indicates number of months that normal expenditure could be paid using liquid assets
58
Debt to income ratio:
= annual debt repayments / gross annual income
- assesses debt burden by calculating % of income spent on debt repayments
59
Savings ratio:
= monthly savings / monthly gross income
- shows % of income saved
60
Investment assets to total assets ratio:
= investments / total assets
- shows % of assets invested
61
Solvency ratio:
= Net worth / total assets
- shows ability to pay all debt with assets
- higher = better
62
Overconfidence bias:
- overconfidence in one’s own ability, knowledge and control over the outcome, leading to over optimistic expectations of outcome.
- e.g. Belief can consistently outperform market
Q: how confident are you that you can consistently outperform the market?
63
Loss aversion:
- prefers to avoid losses over enjoying equivalent gains
- losses are perceived to be more painful than the pleasure of gains
E.g. resisting to sell an underperformer
Q: would you prefer to avoid losses, even if it means lower gains?
64
Regret aversion:
- avoids making decisions due to the fear of regretting the decision later
E.g. Keeping underperformers in case it rebounds after selling
Q: How often do you worry about regretting your investment decisions, after the fact?
65
Status quo bias:
- The preference of staying the same over making changes
E.g. Resistant to rebalance portfolio
Q: How comfortable are you with making changes to your portfolio?
66
Anchoring:
- Having heavy reliance on initial information (the anchor)
E.g. Fixated on initial share price paid and basing decision on that, rather than current information / price.
Q: Does the price you initially paid for a stock influence your decisions to sell?
67
Herding:
- Following / Mimicking actions of others/groups - leading to a lack of informed and independent decisions.
E.g. Stock fads: Game Stop, Bitcoin.
Q: How much do investment choices of others influence your own decisions?
68
Renewable vs convertible life cover?
Renewable: Allows to affect a similar term policy with no further medical underwriting.
Convertible: Allows to convert to endowment or WOL without further medical underwriting.
69
6 Features of state pension:
- universal benefit: not means tested
- 35 years NIC for full / 10 years minimum
- guaranteed & paid for life
- pay as you go / unfunded: relies on current workers NIC to fund
- inflation proofing: triple lock - higher of;
• UK earnings increase
• 2.5%
• CPI
- currently £221.20pw
70
7 features of EIS:
- £1m limit
- 30% income tax relief (min of 3 years)
- carry back income tax relief to 1 previous year
- CGT exempt (3 years)
- CGT deferral: 3 years before / 1 year after EIS investment
- BPR: no IHT after 2 years
- loss relief
71
5 features of VCT:
- £200k limit
- 30% income tax relief (5 year min)
- tax free dividends
- CGT exempt (no 5 year min)
- no loss relief or carry back
72
7 features of SEIS:
- £200k limit
- 50% income tax relief (3 year min)
- carry back income tax relief 1 previous year
- CGT exempt (3 year min)
- CGT reinvestment relief (50% relief on another asset into SEIS)
- BPR: no IHT after 2 years
- loss relief
73
QSR:
- applies on death within 5 years of transfer
- % of relief depends on how long death occurs after transfer received:
• 100% of QSR if death in 1 year of transfer
• 80% of QSR if in 2 years
• (60-3, 40-4, 20-5)
Calc:
(Gross transfer - tax) / (gross transfer) x tax paid
= QSR (20-100% of depending on years)
74
Discretionary Trust:
- CLT (20% lifetime over NRB)
- Disposal for CGT (holdover available)
In trust income:
• £1K basic band: 8.75% divi / 20%
• above £1K: 39.35% divi / 45%
In trust CGT: £3K allowance - 20% / 28% residential property
• transfer to bene’s = disposal (holdover available)
CGT for beneficiaries: own allowance/rates.
IHT:
• 10 year periodic charge: 6% of value
• exit charge: 30% of lifetime charge, time apportioned
Income Distribution to beneficiaries:
• 45% credit
• personal allowances, personal rates
75
Bare Trust:
- PET
- Disposal for CGT (no holdover)
- income and gains paid by beneficiaries (own allowances and rates)
- Part of beneficiaries estate for IHT
76
Interest In Possession Trust:
- CLT (after 2006)
- disposal for CGT (holdover available)
- trustees pay income tax in trust:
• no allowance
• 8.75% dividends / 20% all else
• no HRT or ART
- beneficiaries pay income tax as normal (reclaim available)
- £50% of CGT allowance - 20%/28%
- added to beneficiaries estate for IHT
- periodic charge: 10 years, 6% of value
- exit charge: 30% of lifetime charge, time apportioned.
77
2 Advantages of holistic planning?
- all aspect of clients financial life can be considered together and at the same time.
- recommendations made in one area can support the strategies recommended in another area.
78
5 Valuable feedback areas for planner:
- communication: how well does planner explain things? Does client understand what the plan is designed to achieve and why?
- engagement: how involved does the client feel? Do they have opportunities to ask questions?
- value for money: do they feel they are getting value from services paid for?
- satisfaction: how satisfied is client? Would they recommend?
- accessibility: how easy is planner to contact? Do they return calls and emails?
79
5 reasons why is financial management necessary?
- controls spending: resources are likely to be limited - budgeting helps understand I&E to live within means.
- promotes saving: 3 savings habits - contractual, residual, discretionary. FM will help increase discretionary.
- establishes EF: helps understand how much is needed.
- plans for unexpected: encourages to think about future and plan for the ‘what ifs?’
- saving for retirement: increased life expectancy = longer time in retirement. Encourages to think about future needs and how to get there.
80
5 Investments exempt from CGT:
- NS&I / Premium bonds
- Gilts
- Qualifying corporate bonds
- ISA’s
- Main residence
81
3 key aspects of MPT:
1) Diversification: argues that it reduces unsystematic risk and a portfolio with various asset classes is less risky than just one asset class.
2) Correlation: Compliments diversification when assets do not move in the same direction. Measured with correlation coefficient (-1 is perfectly neg and +1 perfectly pos).
3) Asset Allocation: Refers to the mix of different asset classes - research suggests that AA makes up for 90% of returns and is critical to a portfolio.
Optimal portfolios are created by diversifying investment across a broad range of asset classes, which are not correlated - reducing overall volatility.
82
5 steps to Calculating income need in premature death of breadwinner:
1) use current spending as a starting point for income need
2) deduct any tax redundant costs
3) add additional costs (childcare, cleaner, loss/reduction in survivors income)
4) identify available income moving forward
5) compare new spending vs new income to establish shortfall
83
MPAA:
= £10,000
To prevent recycling by limiting pension contributions of those who have accessed the new pension flexibility rules to make large contributions with CF.
84
5 features / criteria for RNRB:
= £175,000pp
- available if death occurred after 5th April 2017
- reduces value of main residence if passed to direct descendants (children, grandchildren, step/adopted/foster)
- can be transferred between spouses
- £2m estate limit, otherwise reduces by £1 for every £2 over £2m.
85
3 downsides of transferring out of DB:
- Loss of guaranteed income: Index linked, dependents, ‘gold plated’ - employer bears risk.
- Longevity risk: client lives longer than expected and runs out of money (DC).
- Annuity risk: People live longer and reflected in annuity rates for those that have DC. Also complex with many variables.
86
6 Advantages of annuity purchase to hedge longevity risk:
- guaranteed, regular income, options added (GP, VP, Indexation)
- Enhanced rates with lower life expectancy / Impaired rates with serious health
- Many types to choose from (lifetime, fixed term, investment linked, PLA)
- no investment risk
- simple to administer (often one off)
- mortality cross subsidy: those with average life expectancy subsidised by those who die prematurely
87
5 Disadvantages of annuity purchase to hedge longevity risk:
- Based on life expectancy: could be worse off
- complex: Bias (loss aversion, fear of regret)
- rates have fallen due to life expectancy increasing
- inflexible: can’t change mind
- limited options to leave legacy
88
Mortgage interest tax relief:
= 20% relief
Mortgage repayment x 0.20
89
Child Benefit tax charge:
A partner with over £50,000
- first/only: £24
- other children: £15.90
X52
90
Process to determine if client has sufficient resources for future income needs (no cashflow analysis):
1) assumptions about retirement age, spending, and life expectancy:
- considering risk, timescale, need
2) assumptions about sources of net income in retirement:
- BTL
- SP
- pension income
- inflation increases
3) draw table for each year to work out shortfall/surplus:
- age, income need, income sources / inflation, discount back to today
4) discount total shortfall / surplus back to todays money.
91
How to change will after death?
- DOV: within 2 years, anyone of choice.
- Disclaimer: within 2 years, giving up own rights and passing on to remaining beneficiaries.
92
Equity release pathways:
Lifetime mortgage:
- secured mortgage on home
- lump sum or income
- interest rolled up until end of
- repaid when sold
Home reversion:
- sells all or part of home
- belongs to someone else
- still lives there, rent free
93
3 key discussion points for discovery meeting:
1) Whether financial planner can help client (do services meet needs?)
2) Identify if there are any conflicts of interest?
3) establish scope of engagement (proposed work, ongoing service, charges and fees)
94
4 key pieces of information needed to prepare a financial plan:
1) Goals and objectives
2) Attitude to risk
3) income and expenditure
4) assets and liabilities
95
Choose and justify 5 key assumptions:
1) life expectancy: impacts income and capital needed.
2) Annual pension income: impacts income need from other sources.
3) Annual pension increases: impacts the real value of pension income in future.
4) investment returns: impacts amount of investment/saving needed to meet income/capital needs.
5) annual inflation: impacts the real gross/net amount of income needed.
96
Describe 3 times of saving habits:
1) Contractual: mandatory and in line with a formal agreement (mortgage payments)
2) discretionary: done with intention (pension/ISA saving)
3) residual: when there is money left over after normal spending.
97
3 benefits of ETF investing:
- Diversification
- lower cost: passive and no stamp duty
- convenient and liquid
98
4 key areas that impact capital need on death:
- IHT
- Contingency sum
- debts/liabilties
- immediate costs: legal/funeral costs
99
3 stages of retirement planning:
1) Pre retirement: establish desired lifestyle in retirement, how to fund and where to invest.
2) At retirement: Confirm if resources are sufficient and how to best utilise the resources.
3) Post retirement: Focus on preserving wealth. If a surplus, consider estate planning.
100
What is sequencing risk:
When too much income is being taken while markets are down, so crystallising losses are having a greater impact on remaining savings.
101
What is the risk of ruin:
The risk of depleting / spending capital to the point there is no longer anything left to support standard of living.
102
2 advantages of DGT:
1) provides access to capital (up to 5%pa), giving income for life.
2) Exempt from IHT after 7 years. If dies within 7 years, gets an immediate discount for IHT, based on the income taken (younger = greater discount)
103
3 disadvantages of DGT:
- relatively inflexible and income payments cannot be changed.
- payments capped at 5%
- unspent income will build up in estate
104
3 advantages of salary sacrifice:
- No NI is paid on sacrificed amount, unlike relief at source.
- NI savings can be put into pension (more towards goals). Employer may also put their savings in.
- Does not require self assessment, as full relief is given automatically. Relief at source will require tax return for HRT/ART.
105
3 disadvantages of salary sacrifice:
- lowers take home pay.
- reduces amount one can borrow.
- impacts other earnings related benefit (DIS/IP).
106
3 ways to save on CGT for BTL:
- sell over several years (allowances/rates)
- document all costs to offset allowable deductions.
- turn rental properties into holiday lets to enjoy BADR (10% CGT vs 28%).
107
3 advantages of selling BTL:
1) Simplifies affairs: may not need to do tax return or tax planning.
2) Less hassle: no tenants, void periods, repairs.
3) more liquid: invest in ISAs and also tax efficient.
108
3 disadvantages of selling BTL:
1) Incur CGT
2) Loss of income stream
3) may lose out on capital growth.
109
4 ways to save income tax:
1) more into pensions
2) explore salary sacrifice / NI savings into pension
3) invest in VCT/EIS (attitude to risk)
4) transfer ownership/income to lower tax paying spouse.
110
2 disadvantages of holistic financial planning?
- It can be overwhelming and therefore prevent client from taking action.
- it takes more time and costs more - client may not be able to afford.
111
3 benefits of transferring out of DB:
- Flexibility: income, investment, 25%.
- Death benefits: whole fund to beneficiaries vs no fund with DB.
- sponsoring scheme in financial difficulties: PPF safety net, but is capped.
