Serving The Retail Customer Flashcards
(120 cards)
1
Q
what client information should you obtain as an advisor?
A
-basic client details
-financial situation
-investment objectives
-risk profile
-understanding and experience
2
Q
What must you ensure when making recommendations?
A
- you know your client
- recommendations must match risk profile
- recommendation is the most appropriate and explain why
- provide the level of service committed to at the initial disclosure
3
Q
what should all communication be?
A
clear, fair and not misleading
4
Q
what should the characteristics of a suitability report be?
A
- tailored to client
- specific to client’s demands and needs
- explain reasons and disadvantages of recommendation
- highlight needs not covered by recommendation
5
Q
what is the main priority for financial needs?
A
budgeting and managing debt
6
Q
what is debt consolidation?
A
- negotiates a new loan to pay off others
- lower interest rates
- charging fees can be high
7
Q
what is the transfer of property in exchange for a mortgage called?
A
the assignment
8
Q
what are the 2 main mortgage repayment types
A
capital repayment and interest only
9
Q
what are the different mortgage structures (9)
A
- capped
- cap and collar
- discount
- euro
- equity linked
- fixed interest
- flexible
- offset
- tracker
10
Q
what are the 2 equity release schemes?
A
- lifetime mortgage
- home reversion plan
11
Q
what is a home reversion plan?
A
- sell all or part of a home for cash lump sum
- get a regular income or just lump sum
- continue living in the home under a lease until death or move into long term care
12
Q
what is a lifetime mortgage?
A
- a mortgage secured on the property until you die/move into long term care
- roll-up mortgage: interest is added to the loan, and then the original amount borrowed, plus the rolled up interest, is repaid when the home is eventually sold
- fixed repayment: no interest payable, but upon house sale, pay lender a higher amount than originally borrowed
- home income plan: money borrowed pays a regular fixed income for life (an annuity)
13
Q
what are home purchase plans?
A
- help to buy a home without paying interest
- may be of special interest to Muslims buying a home in compliance to Sharia (Islamic) law
14
Q
what are the 2 types of home purchase plan?
A
- Ijara - firm holds onto monthly payments agreed towards buying property, then uses this money to pay for property at the end of the agreement.
- Diminishing Musharaka - payments made towards buying the property buys an extra slice of the firm’s share. Client’s share increases, firm’s share and rent paid for using the firm’s share decreases.
15
Q
what is the other name for sale and rent back agreements?
A
mortgage rescue
16
Q
what is the purpose of sale and rent back schemes?
A
allows clearance of the mortgage but you can stay in your home
17
Q
what are the risks of sale and rent back agreements?
A
- you may have to leave when the term ends
- you could be evicted if you breach the tenancy agreement
- the property could be repossessed if the buyer falls into financial difficulty
18
Q
what are the 2 types of loan?
A
unstructured and structured
19
Q
what is an unstructured mortgage loan?
A
- you can repay the loan at anytime without penalty
- typically used on commercial property
20
Q
what is a structured loan?
A
- fixed interest rate
- high costs
- penalty for paying loan early
- tend to be used for smaller purchases eg furniture or a car
21
Q
what types of financial protection are top priorities for most clients?
A
- life and health cover
- doesn’t necessarily exclude all other financial aims though
22
Q
how can death benefit be easily calculated?
A
taking income, minus benefits, pension benefits and cost savings from death, and multiplying by 10.
23
Q
what policy can be used to account for IHT liability?
A
whole of life, second death (last survivor) policy written in trust for the heir(s)
24
Q
what are the stages of the financial life cycle categorised as?
A
- vulnerable years
- relaxed years
- anxious years
25
what are the vulnerable years?
- early years of family & marriage where protection needs are high and incomes are relatively low
26
what are the relaxed years of the lifecycle?
- in the 40s when dependants are becoming financially independent - - --- disposable income increases
27
what are the anxious years in the life cycle?
- 50s+ when earning power peaks
- mortgage is paid off
- more likely to become ill
- little time to make up pensions shortfalls
- cost of protection cover increases
- IHT becomes a consideration
28
what are the 3 main types of life insurance?
- whole of life (WOL)
- term assurance
- endowments
29
what is term assurance?
- lump sum paid on death if dying within the term of the policy
- can be level, increasing or decreasing
- family income benefit - pays an annual / monthly amount for the remainder of the term
- convertible to WOL and renewable
30
what is an endowment policy?
- primarily savings vehicle
- pays lump sum on death
- doesn't provide a significant level of life cover - premiums directed more in savings, with little left over for life cover.
- option to add critical illness cover (CIC) at an extra cost
31
what is whole of life (WOL)?
- guaranteed level of life cover for lifetime
- can include an investment element
32
what are the features of a 'with profits' WOL policy?
- guaranteed minimum level amount of life cover
- increases with annual 'reversionary' bonuses, (not guaranteed)
- a final 'terminal bonus' is paid on death, increasing the pay out
- may accumulate a 'surrender value'
33
what is flexible WOL?
- can choose between min. and max. level of cover
- can change this at any time within these upper & lower limits
34
what is flexible WOL policy also known as and why?
- commonly known as 'unit-linked' WOL plans
- premiums are used to buy units in one the life office's funds
- each month the life office calculates cost of cover for the next month, deducts this charge by cancelling just enough units to pay for it
- plan then grows in value if no. of units linked to the policy are added and if units increase in value.
35
what are the common deferred periods for income protection?
4, 13, 26 and 52 weeks
36
what is personal accident and sickness cover?
- regular benefit
- may include a lump sum
- short deferred periods
- only pays out for 1-2 years
37
what is the benefit of personal accident and sickness cover compared to Income Protection (IP)?
- shorter deferred periods
- reduced no. of health q's asked
- more occupations accepted
- regular benefit likely to be fixed sum, not a % of policyholder earnings
38
what is PPI (payment protection insurance), also known as?
accident, sickness and unemployment benefit (ASU)
39
what are the minimum standards of mortgage PPI, as set by the ABI?
- must provide ASU cover
- pay out after 60 days
- pay out for at least a year
- pay the self employed
40
what is a good tool to support the explanation of the balance between risk and reward to the client?
attitude to risk questionnaire
41
what is the objective of regular savings?
to turn small amounts saved on a regular basis into larger sums
42
what are the possible objectives of lump sum investments?
- maintain value over time in real terms
- to provide potential for real growth
- provide an income
43
what is the definition of 'short term'?
instantly accessible
44
what is the definition of 'medium term'?
covering a 5-15yr period
45
what is the definition of 'long term'?
a 15yr+ period
- the longer the term, the more important it is to maintain and build on their value
46
what are the 3 priorities that come ahead of investing?
1. pay off debts
2. protect the family
3. emergency fund
47
how does money in savings grow?
through interest
48
what are the 5 main types of savings account?
- savings
- cash ISA
- fixed notice
- fixed rate bond
- high interest regular savings
49
over the short term, what is the only asset that can reliably maintain the nominal value of capital, and achieve any kind of return?
deposit based savings
50
what is the downside of saving?
over the medium to long term, funds can be affected inflation
51
what are the 4 main uses of deposit based saving?
- emergency fund
- liquidity
- future investment opportunities
- an asset class in its own right
52
what are the aims of investment?
to provide capital growth, income or a combination of the two.
53
what are the 4 underlying asset classes of an investment?
- shares
- bonds
- property
- cash
54
what is the 5th growing potential asset class of an investment?
'alternatives'
55
how can you reduce investment risk?
diversification eg through pooled investments
56
give 2 examples of a tax wrapper
- ISA
- Pension
57
what is an investment platform?
provides access to a defined selection of collective investments
58
what is an investment wrap?
a product that often contains its own platform, but allow investors to wrap other products into it
59
what are the 2 ways investors can invest in equity?
- through pooled investments
- directly in stock market
60
what is the main factor affecting share price?
investor sentiment
61
what is investor sentiment?
- the perceived value of the shares
- based on company performance or predictions on economic conditions
62
what is the most volatile of the 3 asset classes?
equity/shares
63
what is the short term use of equity investments?
speculation only
64
what is the medium term use of equity investment?
can provide income via dividends
65
what is the long term use of equity investments?
- real growth
- capital preservation
66
what are bonds also known as?
loan stock, fixed interest, debt securities
67
what are government bonds called?
gilts
68
what can bonds be used for?
a regular income
69
what is the nominal value of a bond?
the amount returned to you when the bond matures
70
what is the main risk of bonds
the company defaulting
71
what is an index linked, fixed interest investment?
- usually gilts
- both capital and interest is linked to retail price index (RPI)
72
what is a loan to a building society known as?
permanent interest bearing share (PIB)
73
what are the features of loans to building societies and banks?
- fixed interest
- undated
- payments can missed - payments do not need to made up later
74
what are perpetual subordinated bonds?
loans to demutualise a building society
75
what is a strategic bond and why are IFAs likely to recommend them?
- investment manager decides on the proportions of gilts
- investment grade stocks and high held bonds
- allow fund to adjust to market conditions
76
what are benefits of investing in property?
- income from rent
- capital growth on sale
77
what is the main risk of property investments?
they're illiquid
"property rich, cash poor"
78
what are the benefits of pooled investments? (5)
- professional expertise
- diversified risk
- reduced dealing costs
- less admin
- more choice
79
what is the aim of passively managed funds?
to track the market
80
give 4 examples of open ended investment funds
- unit trusts
- open ended investment companies (OEICs)
- SICAV?
- FCP?
81
what are endowments?
- regular premium policies
- combine investments and life cover
- can be used to repay interest only mortgages
82
what is the limit for premiums for savings endowments?
£3600 per year
83
what are investment trusts?
- listed companies with a set number of shares
- allowed to borrow money to invest (gearing)
84
what does it mean if an investment trust is "trading at a premium"?
there is high demand and the price exceeds the valuation of shares
85
what is the term used for an investment trust where the demand is low and the price of shares is lower than valuation
trading at a discount
86
what is a derivative?
the right to buy or sell another type of asset at a fixed price on a specific date in the future
87
what are the common types of derivative?
futures and options
88
what is a 'contract for differences'?
a contract stating you will pay another person the difference between the current and future value of an asset
89
what is an ISA?
A tax wrapper - protecting investors' income and capital from being taxed
90
what are the different types of ISA?
- cash
- stocks and shares
- innovative finance
- lifetime
- junior
91
what is the ISA limit per year?
£20,000
92
What is the JISA limit per year?
£9000
93
what is the age restriction on a LISA?
under 40yrs old
94
how do you calculate the funding period for a pension?
difference between age and retirement age
95
what did the pension act 2014 set out regarding state pension age?
- will increase to age 67yrs between 2026 and 2028
(has been aged 66yrs for men and women since 2020)
96
what is the limit of pension contributions per year?
£60,000
97
by how much is the annual pension contribution allowance reduced if you earn over £260,000
- reduced by £1 for every £2 over £260,000, down to a floor of £10,000
98
what are your options at retirement?
- take 25% tax free cash
- flexi drawdown where you take on off or regular income
-uncrystallised funds pension lump sum (UFPLS)
99
if reaching state pension age after April 2016, what is the state pension called?
the 'New State Pension'
100
what is the current maximum weekly state pension amount under the new state pension?
£221.20
101
what are the conditions for receiving the maximum state pension amount for the new state pension?
- 35yrs NICs
- not been 'contracted out' at any time in their working life
102
how are earnings usually calculated for defined benefit pensions?
- related to basic salary earnings nearer to retirement (within 3 yrs)
- accrual rates, (how quickly the pension builds up), are 1/60th or 1/80th of earnings for each year of pension scheme membership.
- eg salary £30k, 40yrs pension scheme membership = 40/60 x £30k = £20kpa
103
what are the current employer minimum contributions to a DC scheme?
3%
104
what is the minimum earnings threshold above which employers have to pay into auto enrolment scheme?
£6240
105
what is the nil rate band for IHT?
£325,000
106
what is the IHT limit at which nil rate band is reduced by £1 for every £2 over?
£2million
107
how much is added to nil rate band to a parent who leaves main residence to a direct descendant?
£175,000 - known as the 'residence nil rate band' (RNRB)
108
how can you reduce the impact of IHT?
- making use of allowances
- ensure will is in place and written correctly
- using lifetime gifts
- writing property in trust
- provide money to cover the liability
109
how much IHT is payable above the nil rate band?
40%
110
what type of life insurance policy should be used to cover IHT liability?
WOL, written on a last survivor, (second death), basis, placed in trust
111
how long before death does a gift need to be made, to become exempt?
7 years
112
why might you choose to use a life policy with increasing or reviewable cover when planning for IHT?
to protect against inflation
113
what is the purpose of universal credit?
to streamline and simplify the system, bringing together a range of benefits and credits into a single system
114
are child benefit and child tax credits means tested?
child benefit - no
child tax credit - yes
115
what is statutory maternity pay?
- 6 weeks - 90% paid
- 33 weeks - lower of the standard rate or 90% of earnings
- taxable
116
what are the conditions for receiving SMP?
- must have worked for at least 26wks without break with same employer by the 15th week before baby is due
117
what is income support?
- for families on low incomes
- means tested (benefit amount based on income and savings)
118
who is eligible for job seekers allowance?
- for those who are unemployed
- for those who are looking for work
- for those working less than 16hrs per week
119
what benefit is replacing the DLA?
- Personal Independence Payment (PIP)
- based on an assessment of individual need
120
how long does statutory sick pay (SSP) last for?
28 weeks
