Mixed (Non Case Study) Exam Questions

Question 1

State the process that a financial adviser should follow when providing (8) appropriate financial advice.

Answer 1

 Establish/define relationship/confirm scope of service/fees.
 Fact-find/obtain goals and objectives/confirm capacity for loss/attitude
to risk.
 Analyse current situation/existing investments/identify shortfalls.
 Develop financial plan/research.
 Present financial plan/recommendation/discuss.
 Provide Key Information Documents (KID)/suitability report.
 Implement plan/obtain client agreement.
 Monitor/review

Question 2

Identify the factors that would typically influence a client’s tolerance for risk.

Answer 2

 Timescale
 Age
 Health
 Level of disposable income / emergency fund / wealth
 Degree to which income is secure
 Investment experience
 Financial objectives
 Current market conditions
 Capacity for loss

Question 3

Outline the factors an adviser should consider and the process they should follow when recommending a fund switch. (10)

Answer 3

 Fact-finding/know your client/client agreement
 Assess ATR/capacity for loss
 Timescale
 Charges
 Performance
 Fund choice
 Ethical preferences
 Asset allocation/diversification
 Select fund/portfolio to match risk
 Present KIID
 Obtain client permission/implement
 Suitability letter

Question 4

What are the benefits to a client of receiving and acting upon advice from an (10) authorised financial adviser?

Answer 4

 Their financial problems, goals and priorities will be identified.
 They will benefit from adviser’s research
 The adviser can help with budgeting/cashflow modelling in particular
where income is tight
 Adviser can assist in assessing suitability of existing arrangements
including those that have been inherited (if applicable)
 Assist in tax planning, use of tax wrappers for tax efficiency
 Complete a current assessment of the client’s attitude to risk (ATR)
and capacity for loss
 The client will receive recommendations to meet their personal
circumstances.
 Clear explanation of how recommendations meet their needs and
personal circumstances
 Ongoing service/reviews are beneficial as client’s circumstances
change over the years (self-employment / employment)
 They will have a higher consumer protection by receiving advice than
making own decisions

Question 5

State seven key benefits for of receiving ongoing financial advice.

Answer 5

 Identify targets / objectives
 Analyse existing arrangements / identify shortfalls
 Ensure tax allowances are used
 Assess budget / affordability/ cashflow
 Assess ATR / capacity for loss
 Identify new products / respond to new rules
 Review performance of investments

Question 6

Explain the difference between capacity for loss and attitude to risk. (2)

Answer 6

 Capacity for loss - an individual’s financial ability to absorb losses should they occur
 Attitude to risk is the amount of risk an individual is willing to take - where they are comfortable investing their funds and how prepared they are to see the value of their investments fluctuate and see potential losses

Question 7

State four limitations of using an asset allocation model

Answer 7

 It does not recommend an appropriate tax wrapper/does not take into account the client’s tax status
 Charges are not taken into consideration
 Questions asked not always relevant to the client’s circumstances
 Different models produce different results
 Underlying assumptions subject to change/based on historic data
 Needs to be reviewed/only relevant at a specific point in time

Question 8

Outline the six steps of the financial planning process (ISO22222).

Answer 8

 Establish and define the client and personal financial planner relationship
 Gather client data and determine goals and expectations
 Analyse and evaluate the client’s financial status
 Develop and present the financial plan
 Implement the financial planning recommendations
 Monitor the financial plan and the financial planning relationship

Question 9

Briefly describe stochastic modelling.

Answer 9

 Stochastic means having a chance or random element.
 Complete a profiling questionnaire
 It is a technique that uses asset allocation
 Towers Watson leading company in UK
 Forecasts a range of possible returns from different portfolios
 Helps clients choose the appropriate portfolio of investments by
showing the range of possible outcomes from each portfolio and the probability of achieving them

Question 10

Explain to your client why their multi-asset fund* may be suitable for their attitude to risk.
(* Insert appropriate fund depending on the fact find).

Answer 10

 Diversification across all asset classes / geographical spread
 Potential for growth
 Correlation of assets controlled
 Reduces volatility/risk
 Actively managed / professional management
 Rebalances regularly
 Risk rated to match ATR
 Access to specialist investments

Question 11

State three different methods of fee charging. (3)

Answer 11

 Fund based/percentage of assets
 Time based  Fixed

Question 12

Your clients have asked you for further clarification on how they can pay for advice. Identify three benefits and three drawbacks for them for each of the remuneration strategies below:
i) Fund-based trail fees
ii) Time-based charging

Answer 12

Fund-based advantages
-Easy to understand/value for client
-Ease of payment; provider/product pays rather than client
-Planner has incentive to grow assets/receives higher fee if assets grow

Fund-based disadvantages
-Larger portfolios not generally harder to administer/fee does not always accurately reflect time spent
-Separate/additional charges would need to be applied for tax planning/insurance recommendations
-Difficult for client to quantify charge year on year/not transparent

Time based advantages
-Familiarity/ability to compare/same as other professionals
-Easy to understand and value
-Basis of charge based on amount of work and complexity
-Charges do not increase just because fund values increase/can set budget/agree in advance
-Charge independent of product sale and paid from personal funds

Time based disadvantages
-Sometimes perceived to reward inefficiency/incentive to ‘run up the clock’
-May lead to client avoiding contact due to worries about cost
-Client will need to make payment from personal funds/net income
-Advisory Services are VAT rated and subject to further 20% VAT (intermediation services (not advice) are not VAT rated)