Generic Questions

Question 1

What are the six steps in the financial planning process? (ISO22222)

Answer 1

1. Establish and define the client and personal financial planner relationship.
2. Gather client data and determine goals and expectations.
3. Analyse and evaluate the client’s financial status.
4. Develop and present the financial plan.
5. Implement the financial planning recommendations.
6. Monitor the financial plan and the financial planning relationship.

Question 2

What are the potential benefits of receiving and acting upon advice from a qualified financial adviser?

Answer 2

Their 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.
Assessment of attitude to risk (ATR) and capacity for loss.
Receive recommendations/create a financial plan.
Dealing with professional/ knowledge/clarity of explanation.
Ongoing service/reviews.
Consumer protection/regulated advice.

Question 3

List 4 benefits and 4 drawbacks if clients pay adviser fees for the initial and ongoing service:

Answer 3

(a) On an hourly cost basis
(b) As a fund-based fee
(c) On a fixed fee basis

Question 4

Hourly cost – benefits

Answer 4

Familiar or same as other professions
Easy to understand and compare
Based on actual work undertaken, amount invested is irrelevant – cheaper for larger sums
Fee cap can apply

Question 5

Hourly cost – drawbacks

Answer 5

Can be seen as inefficient – or adviser ‘running up the clock’
May put clients off making contact or asking for advice
Paid from personal funds
Unknown total cost

Question 6

Fund based fee – benefits

Answer 6

Can negotiate lower fees for larger investments
Payment via provider if not from personal funds
Incentive to grow funds
Attractive for lower amounts /lower fees for lower amounts

Question 7

Fund based fee – drawbacks

Answer 7

Difficult to predict each year
May not be in line with service provided, not reflecting time spent or larger portfolios
not generally harder to administer.
Extra charges may apply for other services.
Reduces potential investment growth

Question 8

Fixed fee basis – benefits

Answer 8

Familiar or same as other professions
Known cost
Easy to understand and compare
Amount invested is irrelevant – cheaper for large sums

Question 9

Fixed fee basis – drawbacks

Answer 9

Is fee justifiable?
Paid from personal funds
May put clients off making contact or asking for advice
Exactly what is included?

Question 10

What is meant by the term ‘risk profile’?

Answer 10

It is 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 and if their investments are lower risk
than they are prepared to accept, they may miss out on higher returns.

Question 11

State the main factors that would typically influence a client’s attitude towards investment risk.

Answer 11

Timescale
Income/expenditure/disposable income/affordability
Assets/investments/level of wealth
Liabilities
Amount of investment available
Age of investor
Experience/understanding of market/investments
State of health
Objectives of investment/income or growth
Change in personal circumstances/marriage/death/job change

Question 12

Outline the process that an adviser should follow to determine the client’s attitude to risk by the use of a risk profile tool.

Answer 12

Each client complete risk profile questionnaire.
This focuses on timescales/priorities/responses to circumstances.
Generates risk score.
Score provides further discussion with client/used to produce asset allocation.
Ascertain capacity for loss.
Adviser and client agree suitable risk profile.

Question 13

Why should an adviser not rely solely on a risk profiling tool?

Answer 13

Different results for each client would require further discussion.
Different tools produce different results.
Client(s) may not be able to relate to content of questionnaire.
Potential for client to misinterpret/misunderstand question.
Will be unsuitable if they have a zero capacity for loss.
Different risk may be in evidence for different objectives/timescales.

Question 14

Why is diversification important?

Answer 14

Diversification can reduce risk in a portfolio
By holding a different range of assets
Each different investment can perform well in certain market conditions
The downside risk of one investment can be offset by the upside potential of another investment
Diversification can reduce stock specific risk but not market risk

Question 15

State four reasons why a client’s attitude to risk may have changed from high risk to low risk

Answer 15

Investment knowledge has increased/understands the risks of investments
They may have suffered losses/volatility with past choices
They might be nearing retirement age so wants less risk/volatility
Client is looking for a secure income in retirement/their needs have changed

Question 16

Identify and explain briefly the key investment risks that are associated with a portfolio of AIM shares.

Answer 16

Liquidity risk - might be difficult to sell/small trading volumes
Diversification risk - invested in one asset class/small companies/single shares.
Event Risk - company affected by specific event/loss of director
Regulatory Risk - lower level of regulation/lower reporting standards
Taxation/Legislation Risk - Business Relief for IHT may be removed/reduced/company no longer qualifies for BR/leaves AIM market.

Question 17

State the limitations of using an asset allocation model.

Answer 17

Doesn’t recommend an appropriate tax wrapper/take account of client’s tax position
Charges are not considered
Questions asked aren’t always relevant
Different models produce different results
Underlying assumptions subject to change/based on historic data
Needs to be reviewed

Question 18

Describe the process an adviser should follow to advise a client on investment planning.

Answer 18

Establish the relationship, disclosure of status, adviser remuneration.
Establish the client’s goals/expectations/objectives/fact-finding/ethical/affordability.
Timescales for investment.
Attitude to risk/capacity for loss.
Amount of Emergency Fund.
Analyse the client’s situation.
Formulate recommendation/develop the financial plan.
Take into account client’s tax status and use of tax wrappers
Asset allocation and fund selection.
Recommend and implement.
Review/rebalance/monitor.

Question 19

Explain how lifetime cashflow modelling is used

Answer 19

Lifetime cash flow projections are 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, showing the years where there will be a surplus or a deficit.
The main variables are:
o The level of income and capital inputs
o The level of expenditure
o The assumptions made about future increases in income, capital values, expenditure and inflation.
o Projections can then be amended to include the effect of recommendations

Question 20

State the additional information you would need in respect of a with-profits fund, prior to making a recommendation as to whether or not the client should switch to an alternative fund.

Answer 20

Underlying asset allocation/closed fund
Annual bonus history/current bonus rate
Terminal bonus
PPFM
Market Value reduction/charges
Guaranteed bonus/annuity rate
Financial strength/solvency/free asset ratio
Basic sum assured

Question 21

Describe the additional information you would need to advise on a defined benefit scheme

Answer 21

Benefit statement that shows benefits accrued to date
Accrual rate
Pension and PCLS at NRA
How the scheme calculates the PCLS
Normal retirement age
Any penalties for taking benefits early/is early retirement available
Dependants benefits
CETV
Revaluation rates and escalation rates
Scheme financial status

Question 22

Describe the issues that an adviser should consider when formulating a recommendation for an ethical investment strategy

Answer 22

Strength of his beliefs/motivation/how much he wishes to invest
Shades of green
Positive/negative screening
Engagement
Best in class
Range of funds/restricted fund choices/less diversification
Fund performance/increased volatility
Charges
Reputation of fund manager/expertise
Attitude to risk
Tax wrappers/investment wrappers
Ethical banking
Timescale/objective

Question 23

Explain the benefits of a current cash flow statement when devising a financial plan

Answer 23

Shows difference between expenditure and income.
Highlights areas for cost reduction.
Identifies opportunities to fill gaps in planning/establish planning budget.
Can be used for analysing future cash flows/retirements cash flows and contingent cash flows/loss of income on clients’ ill health/death.
Enables the client to understand the long-term impact of large expenditure, equity release, downsizing etc.

Question 24

List the factors that might trigger a review meeting

Answer 24

Job change/redundancy.
Change in income/expenditure/tax.
House move/downsizing.
Children cease dependency.
Inheritance/new monies received.
Change in attitude to risk.
Mortgage changes.
Marriage/divorce/acquiring a dependant.
Change in objectives/significant lifestyle changes/children going to university.
Health situation changes.

Question 25

Explain how stochastic modelling works

Answer 25

Uses a range of historic returns.
Makes assumptions about future returns, inflation rates and interest rates.
Predicts most likely returns and volatility.

Question 26

What are the requirements for making a valid will?

Answer 26

Testator must be of sound mind
Must be at least 18
Must be in writing (typed or hand written)
Must be signed by the testator
Must be dated.
Must be signed by a minimum of two witnesses who are not executors or beneficiaries
Must be a clear intention to dispose of property

Question 27

Describe how a deed of variation is set up and the formalities which must be incorporated within the deed

Answer 27

Must be in writing/legal document
Signed/dated/witnessed
Deed states what is being varied in will/intestacy
Must be clear who is benefiting from the variation
All affected beneficiaries must agree and be over 18 and be of sound mind
It will be treated as taking place on the donor’s death
Must be done within 2 years of death
Deed should not be for consideration of money or money’s worth
Deed should contain a statement that the variation is to have effect for CGT/IHT
Deed should contain exemption certificate for variations of stocks, shares or securities

Question 28

What are the requirements for drawing up a Lasting Power of Attorney?

Answer 28

Two types of LPA - Health and Welfare and Property and Financial Affairs
Individuals can set up one or the other or both
The donor must be over 18 and have capacity to contract
The attorney must be over 18 and not bankrupt
The deed must be signed by the donor, the attorney and a witness
Must be a certificate from a prescribed person confirming donor understands the LPA and they have not been pressured into drawing up the document(s)
Must be registered with the Office of the Public Guardian as soon as possible
Pay fee to OPG to register
Must be arranged before they lose mental capacity
Appoint attorneys/each other
Choose replacement attorneys/appoint children in case both fall ill

Question 29

List the areas that an adviser would need to discuss before any recommendation for a potential equity release scheme can be made.

Answer 29

Expenditure/cost of care/capital wanted
Entitlement to State benefits
Downsizing
Details on any liabilities/debt
Views on estate preservation/minimising IHT
Compliance/Equity Release Council/ATR/specialist advice area

Question 30

What are the main features of the Residence Nil Rate Band?

Answer 30

Home must be inherited by direct descendants (child, step-child, adopted child or foster child) or their lineal descendants e.g. grandchildren
RNRB for 2018/19 is £125,000 per person
Unused RNRB can be transferred to a surviving spouse (even if the first death was before 6thApril 2017)
If the value of the home is less than the RNRB then the RNRB is reduced to the value of the home
The value of the RNRB is reduced if the value of the estate exceeds £2m - £1 for every £2 over this limit

Question 31

List the benefits of an employer offering a salary sacrifice arrangement

Answer 31

Reduces employee’s and employer’s National Insurance contributions.
Increase pension benefit without affecting net pay.
The employer may invest their NIC saving into employee’s pension.
The effect of personal allowance reduction/child benefit tax charge is reduced - saves tax.

Question 32

List the drawbacks of an employer offering a salary sacrifice arrangement

Answer 32

Salary level is reduced which may affect borrowing capacity.
Maximum benefits on income protection insurance may be reduced.
The arrangement to increase pension contributions in exchange for a reduced salary
cannot be binding on the employer.
May impact on future salary increase.
May reduce level of employee benefits.
Extra paperwork/administration.

Question 33

What are the benefits of holding investments on a platform for clients?

Answer 33

Easy access online at all times
Total wealth can be seen at the press of a button
Wide range of providers/asset classes/funds/investments/tax wrappers
Performance is easy to obtain
Full details of investments - online switching
Consolidated tax statements are automatic
Time and effort efficient for the client/their accountant for tax returns
Can promote good relationship with the adviser
Management of family assets – discounts of their charges
Unbundled charging/transparent
Funds can usually be bought without an initial charge
Large portfolios can attract volume discounts
Calculation tools
Reduced paperwork
Reports and valuations can be stored online
Automatic rebalancing

Question 34

Describe 6 benefits of ‘index-tracking’ OEICs and Unit Trusts

Answer 34

Low cost/cost effective
Run by computer system/no human judgement
Potential for growth
Perform in line with the index
Exposure to different asset classes
Geographical diversification/global
Can track any index/wide range of indices to track
Simple to understand/ease of access to markets

Question 35

Describe 6 drawbacks of ‘index-tracking’ OEICs and Unit Trusts

Answer 35

Will underperform the market due to charges
Tracking error/will never match market exactly
Perform poorly in falling market
No active management/no Alpha
Currency risk due to global index‐trackers
Lack of control over underlying assets

Question 36

What are the conditions that need to be met before HMRC can apply an unauthorised payment charge on a recycled PCLS pension contribution?

Answer 36

The PCLS taken together with any other lump sum taken in the previous 12-month
period must exceed £7,500
The cumulative amount of additional contributions must exceed 30% of the PCLS.
The additional contribution must exceed 30% of the normal pattern of contributions.
The recycling of the PCLS to pay additional pension contributions must be preplanned.