Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Chapter 1: The Regulatory Environment > Client Objectives and Advice > Flashcards

Client Objectives and Advice Flashcards

1
Q

What two categories are investors split into?

A

Institutional investor and individual investor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is an individual investor?

A
  • Usually known as high net worth individuals, ultra high net worth individuals, retail clients, private clients
  • HNWI - income over £100,000 per year and assets of at least £250,000
  • Sophisticated investor - someone who understands investment processes and has been certified by the financial services provider
  • Self certified sophisticated investor - FCA allows certain investors to meet specific criteria to complete and sign a statement that qualifies them as a sophisticated investor
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is an institutional investor?

A

Pension funds, charities, insurance companies, collective investment schemes, investment trusts

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What 3 categories are clients split into?

A
  • Retail client - limited knowledge and investment experience, highly regulated, offered more protection
  • Professional client - more knowledge, more experienced, less regulated
  • Eligible counterparty - deemed to have the same amount of knowledge as the financial services firm, therefore has the least protection
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are a firms obligations towards a client?

A
  • All decisions must be suitable to the investor meaning - the client can afford the risk, it meets the clients objectives, the client understands the financial risks involved
  • Customers are treated fairly (Treating Customers Fairly) initiative
  • Identifying vulnerable client - this is someone who due to personal circumstances is susceptible to harm - particularly where a firm is not acting with appropriate level of care
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

If an advisor does not have the knowledges, who should they seek help from?

A

Though it is unlikely, advisors can refer to a specialist, specialists are likely to come from within the firm e.g Caz investment team

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

How are the needs of a client assessed?

A

Hard facts - names, age, residency, dependents, health, marital status, address, employment details

Soft facts - philosophies, views, previous experience

Letter of authority - many clients will not have information on their own files and therefore this may need to be collected from a third party - letter of authority is needed from the client for the TPA

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What investment objectives needs to be identified?

A
  • Risk - what is the risk tolerance? (High the risk, higher the return, higher the equity allocation)
  • Return - required return needed
  • Time horizon - how long does the client want to be invested
  • Liquidity - will the client need to draw on investments? Are withdrawals needed? Income?
  • Tax - is there a tax bill due? What tax position is the client in
  • Regulatory - trust, charities, pension funds (SIPPs)
  • Other unique circumstances
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What types of risks are faced by investors?

A
  • Capital risk
  • Shortfall risk
  • Inflation risk
  • Interest rate risk
  • Currency risk
  • Operational risk
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is capital risk?

A

Equities, bonds, alternatives, commodities, property, gilts all face risk of capital loss

National savings and investment products are backed by the government do not face capital risk

UK gilts bought below par and held to maturity do not face capital risk

** cash deposits face some capital risk if inflation rises, value of money decreases (invisible capital risk)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is interest rate risk?

A
  • ## The rate is usually raised by the MPC during times of high inflation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is inflation risk?

A
  • Rising inflation affects value of investments unless investment returns higher than inflation rate e.g. real return
  • Investors who choose cash deposits as their medium to long term investment face the highest inflation risk
  • Equities aim to return excess in inflation
  • Index linked gilts provide some protection to inflation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is operational risk?

A
  • People
  • Processes
  • External events
  • Systems
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is shortfall risk?

A

Investment return falls short of the amount required to achieve the clients objective

  • Dividends are not guaranteed as they depend on the companies profit
  • Coupons on corporate bonds are not guaranteed as it depends on whether the issuer is willing to pay them
  • ## Variable rate cash deposits have income risk - interests rates fall, interest payable falls
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is currency risk?

A
  • If a foreign currency depreciates relative to sterling. SPICED
  • Forward contracts provide protection against currency risk - a type of derivative that locks in forward exchange rate in a foreign currency. Should a foreign currency depreciate, a gain will be made on the forward contact which will offset the loss on the foreign asset
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

How can a firm determine a clients risk tolerance?

A
  • Level of existing wealth
  • Time horizon
  • Age and familial situation / dependents
  • Liquidity needs
  • Spending requirements
  • Financial flexibility
  • Future financial requirements

**only invest what you are able to lose Is important here

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What questions can be asked to a client to better understand their risk tolerance?

A
  • What are their views, feelings and preferences with investments
  • Answer the risk-reward questionnaire
  • Previous investment experience
  • Whether the client has taken risks elsewhere e.g. money with another IM/is a business owner
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

How is risk reduced in a portfolio?

A

Diversification

  • Investing in different asset classes
  • Increasing number of holdings
  • Investing in different regions
  • Investing in different sectors
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

When there is a diversified portfolio, what happens to systematic and non-systematic risk?

A
  • Diversification vastly reduces non-systematic risk or specific risk within the portfolio
  • Diversification does not take away the systematic risk of the portfolio
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What does specific risk include?

A

Industry, management and business risks

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What does systematic risk include?

A

Interest rate risk, inflation risk and currency risk

22
Q

What is the relationship between correlation and diversification?

A

Positive correlation - assets move in the same direction

Negative correlation - assets move in the opposite direction e.g. equities and bonds

The lower the correlation between the assets in the portfolio the greater the diversification benefits

23
Q

What is the sequence of steps for financial planning?

A
  1. Identify and quantify the financial planner relationship
  2. Collect data to establish the clients current circumstance
  3. Analyse different options to identify shortcomings
  4. Prepare a report and arrange meeting with client
  5. Implement the plan
  6. Monitor and review plan
24
Q

What is mean variance optimisation (MVO)?

A

A computer programme that optimises the risk-return relationship e.g. maximise the return (mean) to minimise the risk (the variance)

25
Q

How do you choose which fund to pick if they have similar performance and similar asset mix?

A
  • Explicit costs (advisor fees, broker fees, management fees, stamp duty, PTM levy of LSE/Takeover Panel)
  • Implicit costs (bid/offer spread, price impact of trade, opportunity cost, cost of dealing within the fund)
26
Q

What are the various interest rates for borrowing?

A

BoE base - 0.5%
Mortgage - 2.5-6%
Unsecured loans - 7-15%
Credit cards - 15-20%
Store cards - 20-35%

27
Q

What needs to be considered when repaying debt?

A
  • Liquidity needs
  • Ability to pay
  • Overall risk tolerance
  • Avoid early repayment penalties
  • Repay firstly the debt with highest interest
  • Important for clients to retain liquid assets for any future expenditure
  • When borrowing, consider the ‘after tax’ investment return
28
Q

How is investment performance benchmarked?

A
  • Against relevant equity index
  • Against sector
  • Comparable managers/funds with similar investment objective
29
Q

What is a will?

A

The wishes of an individual when they pass away

30
Q

What is real property?

A

Land, buildings and rights over property - ‘real estate’

31
Q

What is personal property?

A

Within the personal possession of a person - moveable property

32
Q

What is a trust?

A

A legal arrangement governed by a trust deed. Trusts are used for IHT planning and gifting.

Settlor - monies are settled by the settlor
Trustee - charged with managing and distribution of funds assets to beneficiaries in accordance with trust rules
Beneficiaries - those who benefit from trust funds

33
Q

What are the features of a contract?

A

Consideration - both side must gain something e.g. fee/service

Intention - there must be intention to form a contract on both sides

Terms and conditions - clear, unambiguous and have legal effect

Types of contracts - written contracts are easier, though oral contracts are binding too

Capacity to contract - all contractors but have capacity

34
Q

What impacts an individuals capacity to contract?

A
  • A minor (under 18)
  • A bankrupt person
  • A mentally incapable person
  • A drunk person

*Mental Capacity Act 2004

35
Q

Why may a contract be terminated?

A
  • Lack on intention
  • Unclear terms and conditions
  • No mutual consideration
36
Q

How can a contract be terminated?

A
  • Discharge by agreement - t&c fulfilled
  • Discharge by performance - t&c fulfilled
  • Discharge by frustration - t&c fulfilled
  • Discharge by breach - t&c NOT fulfilled
37
Q

What is a registered document?

A

One whose ownership is recorded on the central register - registration denotes legal ownership e.g. DVLA

38
Q

What is bearer instruments?

A

Are anonymous and freely transferable

Most bearer instruments have intrinsic value such as gold, diamonds

39
Q

What is a nominee account?

A

It has become increasingly popular to hold investments in a nominee company.

With shares held in this way, the nominee appears on the register of members as the legal owner. However, the investor retains beneficial/equitable ownership, and it is the beneficial owner who receives the rights in relation to a share (e.g. voting and dividends

40
Q

What is joint ownership?

A
  • Joint tenancy - on death, assets go to the survivor
  • Tenants in common - on death, assets go to the estate of the deceased, not the survivor
41
Q

What is a power of attorney?

A
  • Where a donor appoints a person with the capacity to contract on their behalf. It must be signed by deed and in front of two witnesses
  • power to sign documents, make purchases, dispose off property, handle financial affairs
42
Q

What are the types of power of attorneys?

A
  • Specific -
  • General -
  • Lasting - appointed when the attorney is in sound mind and made should they lose capacity
43
Q

When can a POA be revoked?

A
  • After death
  • The donor revokes the POA
  • The donor goes bankrupt
44
Q

What is insolvency?

A

When a company cannot pay its debts. More liabilities than assets

45
Q

What are the alternative approaches to insolvency?

A
  • Liquidation - the courts rule that the company should be wound up, its assets sold and creditors paid back
  • Company voluntary arrangement - a formal agreement to make repayments established by courts
  • Informal arrangement - informal agreement to make repayments
  • Administration - the court grants order to give the company breathing space - protection from creditors until plan is in place
46
Q

What is bankruptcy?

A

The legal state of companies and individuals being unable to pay their debts now and in the future

47
Q

Who cannot be made bankrupt?

A
  • The deceased
  • An infant
  • A spouse of a bankrupt person is treated as a separate individual meaning creditors have no claims to their assets

A debtor petition
A creditor petition - if the amount is over £5,000

48
Q

What is an individual voluntary arrangement?

A

Less expensive alternative to bankruptcy for individuals. At least 75% of creditor need to vote in favour of the repayment plan

49
Q

What are wills?

A
  • Specify how assets are to be distributed, who is responsible for children, who will benefit from estate
  • Must be in writing, willingly made, by a person of mental capacity, by a person over 18 years of age, no pressure from anyone else, signed and witnessed by 2 individuals
  • Died testate - valid will
  • Died intestate - no will or no valid will
  • Executors - carry out will and ‘grant probate’
  • Administrators - administrate will
50
Q

What is a trust?

A

Holding a managing money for an individual that is not yet of age to do it themselves

51
Q

What are the different types of trust?

A

Discretionary trust - gives trustees the right to distribute capital and income to beneficiaries as they see fit

Bare trust - trustees takes a nominee role only for beneficiaries

Interest in possession - right to all the income of the property, but not the property itself

Charitable trust - charities set up as trusts or companies - tax benefits

52
Q

What Act are trusts governed by?

A

The Trustee Act 2000
- trustees have a statutory duty of care
- expected to act with a degree of skill and care which is appropriate to their knowledge, expertise and experience
-

Chapter 1: The Regulatory Environment (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions