Flashcards in Advice and Reccomendations Deck (8)
Advantages of Asset Allocation and why it comes before investment?
1. Primary determinant of performance
2. Diversification benefits + match to risk profile (e.g risky client more equities, less cash)
Therefore an agreed asset allocation appropriate to objectives and risk profile is made first, followed by recommendations or ‘fund selection’
FSP: One-off charges
Applied at point of sale and / or exit charges if capital withdrawn within certain time frame
Can be charge for investment advice
FSP: Ongoing Charges and OCF
Investment and administration costs by fund provider and platform fees where the fund is by a platform.
Some quote an ‘Annual Management Charge’ (AMC) for the investment management services (such as research and portfolio management).
OCF includes costs such as the AMC and extra service charges such as keeping assets safe and calculating fund unit / share price
OFC must be displayed in the ‘KIID’ of a Unit Trust or OEIC
OCF actively managed = 0.75-1.5%
OCF tracker = 0.15%
FSP: Additional Trading Costs
- commission to stockbrokers
- stamp duty on UK equities
- performance fee
MiFID II requires additional charges to be seperated from OCF and be reported back to client
More transparency and shows costs were much higher than just OCF
FSP: Financial Stability of Provider and Life Assurance Companies
Most important for 'With-profits' based investments managed by a ‘Life Assurance’ company.
With-profits funds deliver a ‘smooth return’ in form of bonuses
The provider will put capital into reserves during strong returns and draw on them when the rate of bonus to be paid is higher than the returns achieved
FSP: Stability, Independence of Service Providers and Auditors
Service providers (investment managers, brokers etc) should all be independent of each other and external
Well suited auditors should be appointed
E.g Bernard Madoff Investment Securities ponzi
Benchmarks and Performance
Absolute return is not a good indicator, managers can be bench marked against managers of similar investments and size
However, neutral, unbiased benchmarks are the best method, such as ‘Market Indices’