Section 5.5- 5.7 - Advice and recommendations Flashcards
What is the financial planning process
- Identify and quantify the clients objectives
- Collect data and determine clients goals and expectations
- Analyse the clients financial status
- Develop and present the plan
- Implement the financial planning recommendations
- Moinitor the financial plan
How should recommendations be reported to a client
- Suitability report
- Meeting
What is asset allocation
- Refers to the mix of underlying assets in a portfolio
- The main asset classes are cash, fixed-income secruties, equties etc
What factors are important in determining the returns of an investment portfolio
- Stocks/fund selection
- Market timing
- Asset allocation makes up for 90% of the variation in the return of investment portfolio each quarter
What assets may investors typically have in their portfolio depending on their risk
- Risk averse investors are likley to invest in more fixed-income secruties due to them being steady, low risk returns
- A client that is willing to bear more risk will typically have a greater proportion of thier portfolio invested in equties
When and only can specific investment recommendations be made
- In the context of an agreed asset allocation
What are the two types of charges of funds
- One-off charges - Paid at the point or exit of sale
- Can be the fee paid for investment advice
- Ongoing charges - made up of administration costs e.g platform fees and is paid annually
- OCF replaces the total expenses ratio (TER) as the preferred charge figure
- The OCF must be displayed in the key investor infomation document
Ongoing Charges Figure (OCF)
What other costs are there associated with the investment selection process
- Trading costs
- higher for funds that trade regularly rather than adopting a buy-hold approach
- Trading costs include commission paid to stockbrokers and stamp duty on UK equties
- Fee to the platform used - typically annual percentage charge of between 0.30-0.45%
- Performance fee - usually 0.75%-1.50% for activley managed fund
What do MiFID II require from investment managers in terms of costs
- Disclose additional transaction costs that are charged to their funds
- Requires all independent financial advisors (IFA’s) to report all the costs back to their clients - created greater transparency
What other factors should be considered when making a fund selection
- Past performance
- Financial stability of the provider
- Trustees
- Custodian
- Auditors
When is a benchmark used to measure performance of an investment
- When using a benchmark it must be neutral, unbiased and made up of similar investment types
- Market indices are the most common type of benchmark
Why are reviews neccessary in the financial planning process
- Reviews should take place at least annually
- Reviews are important to:
1. Check for any changes to the clients circumstances (risk profile and objectives)
2. Monitor performance against objectives stated (is the portfolio matching or outperforming the market)
3. Rebalance the portfolio - may involve taking gains from asset classes that have grown significantly and reinvesting in asset classes where the portfolio is underweight.
When is a suitability report not required
- If the recommended investment is not a packaged product
What investments are likley to be affected by credit risk
- Credit risk is associated with debt instruments
- UK Corporate bonds face the highest risk of default
- Savings account at UK banks have a lower risk of default, and if it does then the deposist are protected by the deposit protection scheme.
Which investment is the most tax-effcient
- Personal Pension Scheme has tax advanatges for contributions, can grow largley tax free and provides a tax-free cash lump sum
