Generic Questions Flashcards
Outline the potential benefits of receiving and acting upon advice from a qualified financial adviser?
• Financial problems, goals and priorities will be identified.
• Benefit from adviser’s research.
• Help with budgeting/cash flow.
• Assessment of suitability of existing arrangements.
• Tax planning, use of tax wrappers or tax efficiency.
• ATR and CFL.
• Receive recommendations/create a financial plan.
• Dealing with professional/ knowledge/clarity of explanation.
• Ongoing service/reviews.
• Consumer protection/regulated advice.
Explain the process a financial adviser should follow to establish a client’s aims and objectives.
• Recognise needs and objectives.
• Help clients understand general aims and specific objectives.
• Ask open and closed questions/obtain hard and soft facts.
• Ensure objectives are SMART.
• Identify which are short-term/long-term/emphasis importance of long-term needs.
• Establish views on family/dependants.
• Establish timescales.
• Quantify and qualify objectives.
• Prioritisation/different views/not feasible to achieve all goals.
Explain what should be set out in an investment policy statement.
• The purpose of the investments.
• The income or growth objectives.
• The timescale.
• A statement about the client’s risk profile(s).
A statement about asset allocation.
• Other issues such as ethical investment.
Explain how lifetime cash flow projections/modelling is used.
• Used to forecast clients’ income and expenditure profiles over the long term.
• They provide a year-by-year summary of cash paid to and paid out by the client.
• Will show the years where there will be a surplus or a deficit.
• The main variables are:
- The level of income and capital inputs/level of expenditure.
- Assumptions about increases in income, capital values, spending and inflation.
- Projections can then be amended to include the effect of recommendations.
Outline the key information that should be taken into account by a financial adviser when building a lifetime cashflow model.
• Current income needs/future income needs.
• Planned capital expenditure/any further inheritances.
• Current assets/current income/level of guaranteed income (State pension).
• Growth rate assumptions/interest rate assumptions/charges.
• Inflation assumptions.
• ATR/CFL.
• Longevity/health.
• Market corrections/estimates of market falls/stress test.
• Impact of death of either client.
Explain the limitations of cashflow modelling and why they should not rely on this as the sole method of planning future income needs.
• Provides estimates only/snapshot of current situation.
• Inflation assumptions can be incorrect.
• Growth assumptions may not be achieved/Investment returns not guaranteed.
• Personal circumstances can change/ill health/loss of income/objectives can change.
• Tax rules may change.
• ATR/CFL may change.
• Charges/fees can change.
• Regular reviews required/needs to be updated regularly.
• Input errors/misunderstanding of information by client or adviser.
Outline the process a financial adviser should follow to provide clients with suitable advice on their existing investments.
• Disclose status/fee/client agreement.
• Fact-finding/goals/objectives.
• ATR/CFL.
• Analysis of the client’s situation/affordability.
• Undertake research.
• Formulate recommendation/develop plan.
• Make a presentation/recommendation to client.
• Implement/suitability letter.
• Annual review/monitor.
Outline the factors an adviser should consider and the process they should follow when recommending a fund switch.
• Fact-finding/knowing your client/client agreement.
• Assess ATR/CFL.
• Timescale.
• Charges.
• Performance.
• Fund choice available.
• Asset allocation/diversification.
• Select fund to match ATR.
• Present client with documentation.
• Obtain client permission/implement.
• Suitability Letter/recommendation letter to client.
Outline the process you would follow to enable you to review the performance of an existing investment.
• Letter of authority/obtain plan details.
• Confirm date of purchase.
• Base cost/any further investments/withdrawals/fund switches.
• Identify reinvested income.
• Calculate gain/performance history.
• Assess asset allocation.
• Identify suitable benchmark.
• Identify Alpha/compare against benchmark.
• Review charges.
• Comparison with risk-free return/risk adjusted return.
• Review volatility/risk rating of fund.
• Assess funds against ATR/CFL.
Explain what is meant by the term ‘risk profile?
• The level of fluctuation/volatility that clients are prepared to accept in their investment/pension portfolio.
• Holding investments that are higher risk than their risk profile may result in unacceptable losses in poor market conditions.
• If investments are lower risk than they are prepared to accept they may miss out on higher returns.
Why should an adviser not rely solely on a computer-based risk profiling tool to confirm a client’s ATR?
• Different results for each client would require further discussion.
•Different programmes produce different results.
• Potential for them to misinterpret/misunderstand question.
• Clients may not be able to relate to content of questionnaire.
• Will be unsuitable if they have a zero CFL.
• Different risk may be in evidence for different objectives/timescales.
Describe the steps that a financial adviser would follow to ascertain attitude to risk.
• Clients complete risk profile questionnaire.
• This focuses on timescales/priorities/responses to circumstances.
• Generates risk score.
• Score provides further discussion/used to produce asset allocation.
• Ascertain CFL.
• Adviser and clients agree suitable risk profile.
What does an adviser need to take into account when undertaking a risk assessment?
Risk tolerance
• Willingness to accept a certain level of fluctuation in investments.
Risk perception
• Personal opinion on the risks associated with making an investment - based on prior knowledge and experience.
Risk capacity
• The actual ability to absorb any financial loss.
• Risk tolerance may be affected by objective measures such as:
- Timescale.
- Family commitments.
- Wealth.
- Stage of life/age.
• Subjective measures include level of knowledge and previous experience with risk.
Explain the importance of reviewing attitudes to risk on a regular basis.
• ATR differs for different objectives.
• Changes based on investment experience/knowledge.
• Changes based on personal circumstances/health.
• Changes based on income/any recent inheritance.
• Fund performance/market performance/ensure investments match ATR.
• CFL.
Explain how a Whole of Life policy can be used to cover current and future
Inheritance Tax liabilities.
• In trust.
• Benefit outside of the estate/no probate/paid quickly.
• Premiums classed as being out of normal expenditure.
• Sum assured set to meet current IHT liability.
• Guaranteed insurability options to keep pace with value of IHT liabilities/inflation.
