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Flashcards in Investment Advice Deck (17)
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What are the three types of client?

  • Retail Client
  • Professional Client (per se or elective)
  • Eligible Counterparty


What is the difference between hard and soft facts?

A hard fact is a real verifiable fact, something that you could find evidence for (salary, name, age, they got divorced 5 years ago etc.).

A soft fact is more of an opinion, it could easily change from one client meeting to the next (they want to retire next year, they are risk averse)


What are the 5 key areas of client info to gather (and which is the most important)?

  • Goals & objectives (most important)
  • Assets & liabilities
  • Income & expenditure
  • Priorities
  • Attitudes to Risk


What are the three attitudes to risk you need to assess?

  • Perception of risk (to do with their understanding of risk)
  • Tolerance of risk (how they feel about risk and the potential of losing money)
  • Capacity for loss (how much they could lose before it impacts on their lives)


What is the guide amount that clients should keep as easily accesible cash deposits?

6 to 9 months of expenditure (not income)


What is the difference between strategic and tactical asset allocation?

Strategic means taking a long term view and rebalancing to stick to that strategy (not reacting to short term fluctuations).

Tactical means re-allocating in the short term to take advantage of short term movements in the market.


What is positive and negative screening (ethical investing)?

  • Positive screening is positive (e.g. DO invest in this company because it does good stuff). The process involves searching out individual investments specifically because they achieve the clients aims (maybe they want to invest in renewable energy companies).
  • Negative screening is negative (e.g. DON'T invest in these companise because they do bad things). The process involves starting with a big benchmark like FTSE, but excluding companies involved in particular things your client doesn't like (tobacco, oil industry etc.)


What are the two approaches to asset allocation?

  • Modern Portfolio Theory - A theoretical approach which aims to balance risk and return, creating a perfect portfolio based on historical returns, risk levels and correlations between assets.  Backwards looking.
  • Pragmatic Approach - Uses subjective judgements about what is likely to happen in the future.  Forwards looking.  There is a risk that bias of the person making the judgement will affect their decisions.


How is diversification achieved in asset allocation?

Using negative correlation!

By investing in companies with negative correlation you remove a lot of the risk and the noise as they offset each other.  But you still benefit from owning the stocks and any long term performance they contribute.


Passive vs Active fund management differences

Passive means just following an index, active means getting stuck in and making decisions to try to beat the index.

Active funds will generally cost more, AMC is higher and there may be performance fees.

Historically however they have not generally performed better than passive funds so it might not be worth paying this premium.



What is churn?

Rebalancing a clients portfolio solely to generate fees.


What are the genuine reasons for rebalancing a client portfolio?

  • If value is returned from an investment (e.g. a bond or structured product matures, you have shares in a company that gets taken over)
  • Clear change of client objectives. This could be to decrease risk profile (maybe because they have retired) or increase it (less likely but still possible, but maybe they just won the lottery or something!)
  • Market conditions affecting their investments
  • Clear instructions from the client to switch


Fund Management

What is the top-down and bottom-up approach?

Which is more related to passive and which to active management?

  • Top-down approach is choosing your central theme (eg UK shares) and working down to the individual shares to buy (start at UK, then allocate to sectors, then allocate to individual companies).  This is passive (since it's based primarily on matching an index or theme).
  • Bottom-up approach is searching for individual investments based on their own characteristics, without consideration of an overall theme.  This is linked to active investment since you're not trying to follow an index.


Fund Management

What are the four methods of bottom-up investing?

  • Value - looking for good value stocks, ones that are cheap, maybe because they're out of fashion in the market
  • Growth (at a reasonable price) - looking for high quality companies offering a long term advantage, they might not be particularly cheap but should perform well in the long run
  • Momentum - looking for stocks that are on a roll hoping they'll keep going up
  • Contrarianism - opposite of momentum, looking for stocks that have been going down hoping that they'll bounce back


Passive Management

What are the two methods of tracking an index?

  • Physical replication (buying shares themselves)
  • Synthetic replication (using derivatives to create the same return as the index)


Passive Management

What are the 3 methods of physical replication?

  • Full replication - buy every share in the index, which is accurate but can be expensive
  • Stratified sampling - buying a representative sample of shares in the index, less accurate but less expensive
  • Optimisation - using a computer model to find the best set of shares to replicate the index, again might be innaccurate if your model is wrong, but will also be less expensive than full replication


Passive Management

What is tracking error?

Tracking error refers to how closely you track the index.

If the tracking error is high it means your fund doesn't stay very close to the index, so there is a higher element of risk for the investor.