5

Question 1

What are the two main types of investors?

Answer 1

Retail and institutional

Question 2

How does the FCA categorise retail investors?

Answer 2

According to their wealth, and experience in order to restrict promotions of, and investments in, riskier types of investments

Question 3

What are the treating customers fairly (TCF) six outcomes?

Answer 3

1. consumers can be confident they are dealing with firms where the fair treatment of customers is central to corporate culture
2. products and services marketed and sold in the retail market are designed to meed the needs of identified consumer groups and targeted accordingly
3. consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale
4. where consumers receive advice, the advice is suitable and takes account of their circumstances
5. consumers are provided with products that perform as firms have led them to expect and the associated service is of an acceptable standard as they have been led to expect
6. consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint

Question 4

What are the three main factors affecting an investor’s needs/objectives?

Answer 4

1. Time horizon
2. Return requirement
3. Risk tolerance

Question 5

What are other factors affecting a client’s needs

Answer 5

1. Liquidity
2. Tax
3. Regulatory requirements
4. Religious/ethical restrictions

Question 6

Describe a client’s financial objectives

Answer 6

Establishing a client’s objectives is a vital first stage in the financial planning process. Financial objectives should be quantified in terms of both how much is required and when. Some objectives may need to be prioritised and amended in light of affordability.

Question 7

Describe a client’s current circumstances

Answer 7

Collecting data regarding a client’s current circumstances is a key stage in financial planning. A fact-find gathers hard facts and soft facts about clients. It may be necessary to clarify details with third parties where a letter of authority will be needed

Question 8

Describe a client’s risk profile

Answer 8

Clients often have limited understanding of investment risk and tend to focus on capital risk. Other risks, such as inflation risk, interest rate risk and shortfall risk may need to be explained to them. Diversification is a way of limiting risk due to the different exposure to the various types of investment risk.

Question 9

What are the key factors that affect a client’s risk profle?

Answer 9

Key factors that affect a client’s risk profile are timescale of the investment amount of risk capital, investment experience and psychology.

Question 10

How many steps to the financial planning process?

Answer 10

Contains six main steps, including reviews of the plan after it is implemented

Question 11

What is the main driver of performance?

Answer 11

Asset allocation is the main driver of performance, and must be appropriate to the client’s objectives and risk profile

Question 12

What should be taken into account when selecting a fund?

Answer 12

Past performance, charges and if relevant the financial strength of the provider

Question 13

What can performance be measured against?

Answer 13

It can be measured in absolute terms of return, but is more meaningful when benchmarked against the performance of a similar investment or fund manager

Question 14

What should a fact-find capture?

Answer 14

All pertinent details, including current and future circumstances, objectives, current and expected income levels, expenditure, current financial status, entitlement of benefits and risk profile

Question 15

What should advsers ascertain?

Answer 15

Whether a client has sufficient emergency funds

Question 16

What is good practice in terms of risk?

Answer 16

To explore all aspects of risk, including product risk and underlying risk as well as the circumstances where these risks might occur

Question 17

What should be considered if client’s circumstances change?

Answer 17

Whether the advice provided remains suitable

Question 18

What are the two main types of pension fund?

Answer 18

Defined benefit (DB) and defined contribution (DC)

Question 19

What are pension funds exempt from?

Answer 19

Capital gains tax and income tax and their investment policy is generally determined by tax considerations

Question 20

Describe the liabilities of pension funds

Answer 20

They are usually long-term in nature, and the asset mix of a fund will depend in part upon the maturity of the fund

Question 21

Which other companies also have long-term liabilities?

Answer 21

Life assurance companies

Question 22

Describe general insurance companies

Answer 22

They tend to have much shorter liabilities arising from the sale of contingency-specific insurance policies. The short-term liabilities of general insurance funds mean that these funds are more heavily focused upon shorter-term assets

Question 23

Which funds are not tax-exempt?

Answer 23

Life assurance and general insurance funds

Question 24

What are funds’ asset allocations primarily determined by?

Answer 24

By analysing the fund objectives (return and risk) and constraints (liquditiy, time horizon, tax, legal, regulatory and other specifics such as ethical constraints)

Question 25

What are the largest institutional funds in the UK?

Answer 25

Pension funds, followed by insurance funds, unit trusts and then investment trust companies. Pension and life funds tend to be dominated by long-term assets

Question 26

What is a certified high net worth investor?

Answer 26

A person with an annual income of £100,000+, or net investable assets of £250,000+

Question 27

What is a certified sophisticated investor?

Answer 27

A person who has a certificate in the required form confirming that they have been assessed as being sufficiently knowledgeable to understand the risk of an investment and signed a statement that it may result in significant risk of loss

Question 28

What is inflation risk?

Answer 28

The risk that the future purchasing power will be eroded by inflation

Question 29

What is interest rate risk?

Answer 29

The risk that the BoE is likely to change over time, feeding through to the rates of interest paid on deposit accounts

Question 30

What is shortfall risk?

Answer 30

The risk that the investment return will fall short of the amount required for the investor to meet their objectives

Question 31

What is credit risk?

Answer 31

The risk of loss of value of a debt investment due to default

Question 32

What is market risk?

Answer 32

Loss of value of an investment due to fluctutation in market determined prices, interest rates or exchange rates

Question 33

What is operational risk?

Answer 33

The risk of failure of an institution due to poor operating procedures or systems

Question 34

What does MiFID II require investment managers to disclose?

Answer 34

Additional transaction costs that are charged to their funds, separately from the OCF

Question 35

Explain a DB pension scheme

Answer 35

The sponsor agrees to pay the member benefits equal to a pre-determined percentage of their salary at retirement or close to retirement, subject to the member’s years of service

Question 36

Explain DC pension scheme

Answer 36

Contributions are used to buy investments and the return on these investments determines the pension benefits