Generic Questions Flashcards
What are the six steps in the financial planning process? (ISO22222)
- Establish and define the client and personal financial planner relationship.
- Gather client data and determine goals and expectations.
- Analyse and evaluate the client’s financial status.
- Develop and present the financial plan.
- Implement the financial planning recommendations.
- Monitor the financial plan and the financial planning relationship.
What are the potential benefits of receiving and acting upon advice from a qualified financial adviser?
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.
List 4 benefits and 4 drawbacks if clients pay adviser fees for the initial and ongoing service:
(a) On an hourly cost basis
(b) As a fund-based fee
(c) On a fixed fee basis
Hourly cost – benefits
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
Hourly cost – drawbacks
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
Fund based fee – benefits
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
Fund based fee – drawbacks
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
Fixed fee basis – benefits
Familiar or same as other professions
Known cost
Easy to understand and compare
Amount invested is irrelevant – cheaper for large sums
Fixed fee basis – drawbacks
Is fee justifiable?
Paid from personal funds
May put clients off making contact or asking for advice
Exactly what is included?
What is meant by the term ‘risk profile’?
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.
State the main factors that would typically influence a client’s attitude towards investment risk.
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
Outline the process that an adviser should follow to determine the client’s attitude to risk by the use of a risk profile tool.
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.
Why should an adviser not rely solely on a risk profiling tool?
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.
Why is diversification important?
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
State four reasons why a client’s attitude to risk may have changed from high risk to low risk
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
Identify and explain briefly the key investment risks that are associated with a portfolio of AIM shares.
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.
State the limitations of using an asset allocation model.
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
Describe the process an adviser should follow to advise a client on investment planning.
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.
Explain how lifetime cashflow modelling is used
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
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.
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
Describe the additional information you would need to advise on a defined benefit scheme
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
Describe the issues that an adviser should consider when formulating a recommendation for an ethical investment strategy
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
Explain the benefits of a current cash flow statement when devising a financial plan
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.
List the factors that might trigger a review meeting
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.
