AF5 Financial Planning Process

Question 0

Risk

Answer 0

Inflation - spending power may be eroded
Market/systematic - stock market may fall
Non systematic - one company may fail/poor management of company may adversely affect performance
Health - unable to work and generate an income
Currency - non sterling assets may suggest by exchange rate movement
Default - debtor may not be able to pay
Provider - investment provider may fail
Taxation/legislation - legislation may aversely affect tax treatment of investments
Diversification - too much exposure to one asset class or geographical region
Liquidity - asset may not be sold when required
Interest rate - rates could rise or fall
Property lending - void periods/damage by tenants/hi cost of maintenance/rents received may not cover costs
Business property relief/current tax benefits/tax concessions - may not be available when business is sold/could be withdrawn in the future/conditions may change
Holiday lettings/location - location may fall out of favour as a holiday destination/area people may wish to live
Political risk - risk of corruption/regime change/change in legislation
Shares in private limited company - articles may place a restriction on selling/if company becomes insolvent then dividends will cease & shareholding will lose entire capital value
Attitude to risk - investment does not match clients stated ATR

Question 1

Financial planning process

Answer 1

1. Relationship between client and adviser
2. Evaluating the clients objectives
3. Understanding clients financial status
4. Making the appropriate recommendations
5. Reviewing the financial plan

Question 2

FSA’s statutory objectives

Answer 2

1. Financial security
2. Market confidence
3. Public awareness
4. Reduction of financial crime
5. Consumer protection

Question 3

How FSA protects investors

Answer 3

1. By authorisation of advisers
2. By authorisation of advisory firms
3. By authorisation of investment firms
4. By regulation of authorised firms and registered individuals
5. By enforcement of the regulations
6. The provision of the Financial Ombudsman Service (FOS)
7. The provision of the Financial Services Compensation Scheme (FSCS)

Question 4

Advisory vs discretionary

Answer 4

Advisory

1. You recommend a course of action to buy, sell or hold and investment
2. The client has the right to accept or reject the advice
3. The benefit is a greater degree of control/involvement

Discretionary

1. You have the right to purchase/sell/retain investments without seeking approval from the client
2. Benefits are less responsibility and investment timing can be made more easily.