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IMC 2 > Chapter 5 > Flashcards

Chapter 5 Flashcards

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1
Q

Two types fo investor

A

Institutional and individual (retail)

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2
Q

Institutional investors

A

Employ fund managers either internally or by outsourcing

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3
Q

How do retail investors compare to institutional

A

Limited time and resources, less knowledge and more tax considerations

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4
Q

What is restricted to certain types of retail investors

A

Riskier types of investment

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5
Q

What is. A certified high net worth investor

A

Annual income of 100k or more

Or

Ne investable assets of 250k or more

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6
Q

What is a certified sophistacetd investor

A

Has certificate to confirm they have knowledge to understand risk of investment and acceptance of significant risk of loss

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7
Q

How to become self certified sophistacetd investor

A

Member of business angels

Made investment in private businesses

Work in PE sector

Director of conmopany with turnover of over 1 million

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8
Q

Restricted mass market investment s3

A

Non readily realisable securities (unlisted shares or bonds)

Peer to peer agreements or portfolios

Qualifying crypto assets

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9
Q

Non mass market investments include

A

Non mainstream pooled investments

Speculative illiquid securities

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10
Q

Who can restricted mass market investments and non mass market investments be promoted to

A

RMMI promoted to high net worth and sophistacetd investors

NMMI also promoted to both above along with suitability assessment

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11
Q

4 outcomes from consumer duty rules

A

Products and services - fit for purpose and meet needs of target group

Price and value - good value for money

High consumer understanding to effectively make decisions

Consumer support

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12
Q

Consumer duty 3 obligations

A

Good faith to retail clients

Avoid foreseeable harm to retail clients

Provide support to retail clients

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13
Q

FCA actions on vulnerable clients

A

Understand needs of vulnerable and be able to identify them

Support them

Monitor them

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14
Q

Investor needs /requiremnts

A

Returns

Risk

Time horizon

Liquidity

Tax

Religious or ethical beliefs

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15
Q

How can affordability be judged for clients

A

Preparing cash flow statement showing all clients incomes and expenditures and likely changes

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16
Q

What does surplus cashflow statement and deficit mean

A

Surplus - indicates capital available for saving plans, paying off debt

Deficit means may need a change in financial objectives

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17
Q

How are client objectives determined

A

Using a fact find

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18
Q

Examples of hard facts

A

Name address DOB national insurnace, MArital status etc

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19
Q

Hard financial facts that fact finder finds:

A

Income
Investments
Liabilities
Tax and financial dependants

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20
Q

Soft facts on fact finder

A

Open ended questions to understand preferences

Normally collected face to face

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21
Q

Limitations of fact finder

A

Asks questions that client may not know answer to from memory or records

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22
Q

How does advisor get around finding out info clients don’t know in fact finder

A

Collect info from relevant third parties with a letter of authority

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23
Q

What other factors can affect clients circumstances

A

Satisfaction with life

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24
Q

Capital risk

A

Value o investment may be worth less in future than today

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25
What is short fall risk
Risk that investment return required will fall short of objectives they are required to meet
26
How can various aspects of risk be mitigated
Diversification
27
Client risk profile is made up of 3 factors
Risk required - level or risk associated with required return Risk capacity - clients ability to absorb losses from risk Risk tolerance - level of risk client is comfortable with
28
Four factors that affect the risk profile of client
Timescale of investment = shorter time frame = more cuautious Amount of risk capital (amount of money that could be lost that wont affect the client lifestyle) Investment experience - increase experience = increased risk tolerance Psychology
29
What was the regulators view in 2011
Failure to account for all info affecting risk willingness Relying on risk profiling and allocation tools Poor description of attitudes to risk
30
How can risk tolerance be worked out
Reviewing clients existing investments
31
Capacity for risk?
Reflects clients ability to accept the level of risk identified from the attitude to risk questionnaire
32
2011 guidance on how risk profiling is performed 4 steps
Discussion if conflict between level of return wanted and level of risk wanted Document if client can sustain greater capital loss to generate desired level of return Establish suitability of investment if it requires greater risk
33
Asset allocation
Refers to the mix of underlying asset classes held within a portfolio
34
Most important factor in determine returns in portfolio
Asset allocation
35
Main reason for asset allocation
Diversification benefits
36
Factors that affect fund selection 4
Charges Financial stability of firm Past perf Due diligence in fund selection
37
Two main charges for funds
One off charges Ongoing charges - investment and admin charges, platform fees and annual management charge
38
Where is ongoing charges fee displayed
In the KIID of unit trust or OEIC
39
What costs are there in addition to OCF
Trading costs
40
Typical OCF for active and tracker funds
Active = 0.75% to 1.5% Tracker = 0.15%
41
What does MIFID II require wrt charges
Disclose additional transaction costs that are charged to fund separately from OCF Require all advisors to tell clients of costs
42
What should be the case for hedge funds
Service providers are independent of each other
43
44
How often are reviews in financial planning process
Annually at least
45
What is a financial review a good opportunity to do 3
Check for changes in client circumstances, risk profile Monitor investment performance Rebalance portfolio in line with asset allocation
46
Why does rebalancing of portfolio occur
Portfolio drift due to differing returns
47
How long must a venture capital trust be held before their disposal is exempt from capital gain
No minimum period
48
What investment choice is tax efficient
Personal pension scheme
49
What type of investments is exempt from income tax
Shares sheltered in ISA Uk shares invested through isa for example
50
Tax relief received if 100k invested in unlisted stocks through enterprise investment scheme
Tax relief through scheme is 30% 100k x 30% = 30k
51
52
Most popular way for retail investors to invest
Indirect investment via an investment institution
53
Two main types of pension fund
Defined benefit- agree to pay a certain percentage of final salary also depended t on years of service Defined contribution - contributions used to buy investments and ROI determines pension benefits
54
Pension benefits
Tax relief Contributions receive income tax relief Capital gains and interest earned not liable to tax Lump sum tax received at start of pension also tax free
55
Pension limitations
Pension income is liable to tax
56
What does mature pension fund mean and how will portfolio balance change
A fund with height proportion of contributing employee close to retirement Probable invest less in equities and more into fixed income
57
58
What pension is received yearly for person on 50k who’s contributed for 40 years on a 1/80 pension scheme
50k x 40 /80 =25k yearly
59
Pensions act 2008
Requires all eligible job holders to be enrolled into qualifying scheme Eleible = esteem ages of 22 and state pension age with annual earnings over 100k
60
What was set up for employees if they do not have a suitable pension scheme in place
NEST National employment savings trust
61
Pension flexibility and main options for flexibility 3
Benefits in DC pension scheme can be accessed in more flexible ways from age 55, main options are: Taking an uncrystallised funds pension lump sum = 25% of UFPLS is tax free- no drawdown or annuity plan bought Purchasing. A life time annuity - PCLS of 25% also available at beginning Entering a flexi access drawdown plan - no limit on takings each year with 25% PCLS also available at beginning Pension commencement lump sum tax received= PCLS
62
People who go into pension drawdown plan are given.3 options
Choosing investment pathways Choosing their own investment s Staying with investments they already have
63
4 investments pathways
No plans to touch money within 5 years Plan to use money to set up annuity within 5 years Plan to start taking money as long term income within 5 years Plan to take all money in 5 years
64
Why closure of db schemes
Increased longevity increases cost of scheme Actuarial deficits leading to increasing employer contributions Increasing pension deficits
65
Assurance policies vs life insurnace
Cover the life on an individual over a specified peirod Life insurnace pays lump sum when policy holder dies
66
What are life companies liable to and what do they do (tax)
Capital gain and income tax Invest in ways to minimise tax they pay on funds
67
What does qualifying mean for life assurance policies
Proceeds of the policy are not taxed
68
What are liabilities for life assurance companies and general insurnace companies a
Long term liabilities for life assurance Short term liabilities for general so have to be more liquid
69
70
3 main types of institutional investor
Pension Life and general insurnace funds
71
Main aim of pension and life insurnace funds
Capital growth achieved through equities
72
73
What is important for general insurnace funds
Ability to meet expenses
74
Pension fund average composition of equities and fixed income
53% equities 2% fixed income
75
Life assurance fund composition equities and fixed income
28% in equities 46.5% in fixed income
76
What happens as pension fund matures
Liquidity needs rise
77
Liquidity needs of DC depend on 3
Plan type Employee turnover rates Withdrawal provisions Average age of employee contributing
78
Which has higher liquidity needs and why Life funds or pension
Liquidity needs greater for life funds bc reflecting shorter term liability structure
79
How are life and general insurnace firms taxed
Taxed on their profits Standrd rate corp tax on life business
80
What are general insurers required to do??
Required to keep solvency margins expressed as a percentage of net assets to net premiums written
81
Who is less trick on types of assets insurers can hold Uk or us
Uk
82
Two objectives for fund
Match liabilities and max returns
83
Portfolio constraints 5
Liquidity needs Time horizon - longer time =riskier investments Tax Legal and regs Preferences
84
85
What reg requirements are there for fact finds
None
86
Characteristic of life insurnace and general insurnace funds
Not tax exempt
87
Size of institutional investors in uk in size order. Largest first
Pensions Insurnace Unit trust Investment trust companies
88
How does fax categorise retail investors
Wealth And Experience

IMC 2 (7 decks)

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