Investment Advice Process

Question 1

Advantages of following a model for the investment advice process

Answer 1

• Provides discipline
• Administrative template
• Can be documented for an audit trail

Question 2

Advice process steps (5)

Answer 2

• Determine client’s requirements
• Analyse client’s financial position
• Formulate a strategy to meet objectives
• Produce recommendations and implement
• Revisit investments, objectives and strategy

Question 3

Steps to establish the client and adviser relationship (5)

Answer 3

• Client agreement
• Outline scope of services offered
• Disclosure of costs and charges
• FCA is increasing focus on customers in vulnerable positions
• Vulnerable customers will need additional duty of care and stricter procedures

Question 4

3 types of client

Answer 4

• Retail client
• Professional client
• Eligible counterparty

Question 5

How to analyse a client’s financial position

Answer 5

• Cash flow statement - income and expenditure
• Net assets statement - what client owns and owes
• Tax position
• Lifetime cash flow projections - forecast

Question 6

What is trusted adviser status based on?

Answer 6

Trust in technical competence and know how

Trust in ethical conduct and character

Trust in empathic skills and maturity

Question 7

Clients objectives should be…

Answer 7

SMART

Specific
Measurable
Action-related
Realistic
Time-related

Question 8

Risk assessment factors to consider

Answer 8

Perception of risk - subjective view client has based on their understanding

Tolerance of risk - degree of uncertainty a client can handle, can be affected by stage of life

Capacity for loss - ability to absorb any negative financial consequence

Question 9

What is the critical yield?

Answer 9

Rate of return needed to meet the objective based on given level of investment

Question 10

Strategic vs tactical asset allocation

Answer 10

Strategic:
- Fixed weightings / asset allocation
- Long term
- Infrequent rebalance
- Little variation from objective
- No response to market changes

Tactical:
- Varying weightings / asset allocation
- Short term
- Frequent rebalancing
- Substantial variation from objective
- Take advantage of market changes

Question 11

Positive vs negative screening

Answer 11

Positive screening - invests in companies with responsible approach to practices, products or services

Negative screening - avoids companies that do not meet the fund’s ethical criteria

Question 12

Name 6 things that should be included in an investment policy statement

Answer 12

• Purpose of investment
• Income or growth objectives
• Timescale
• Risk profile
• Asset allocation
• Other issues e.g. ethical