7 - The investment advice process

Question 1

What are the advantages of using a structured advice process?

Answer 1

Discipline for advisers
An admin template for a sequence of actions
Clear compliance trail

Question 2

What are the high level steps of the advice process?

Answer 2

Determine clients requirements
Analyse clients financial position
Formulate a strategy to meet objectives
Produce recommendations and implement
Revist investments, objectives and strategy

Question 3

Under MiFID11, what else must be taken into account over and above the clients investment objectives?

Answer 3

The clients knowledge and investment experience
The clients risk tolerance
The clients ability to bear losses

Question 4

What does the client agreement set out in terms of services, scope and costs?

Answer 4

Renumeration
The service provided and the timescale
Duration of the agreement
Frequency of contact

Question 5

What other issues should the client be clear of within the agreement?

Answer 5

The amount of reporting on investments
The frequency of reviewing the clients circumstances and plans
Whether or not the adviser wll alert the client to any changes to their planning that might be needed in the future

Question 6

What are the key areas in which client information is required?

Answer 6

Needs and objectives
Assets and liabilities
Income and expenditure
Priorities
Attitude to risk

Question 7

If an adviser considers the clients expressed goals to be unrealistic, what should they do?

Answer 7

The adviser should explain to the client why the goal is unrealistic and assist them to reframe

Question 8

Does asset allocation within a portfolio have more or less of an impact than the selection of succesful fund managers?

Answer 8

More of an impact

Question 9

What are the criteria used for ESG (environmental, social and governance)?

Answer 9

Environmental factors including climate change and pollution
Social factors including human rights
Governance including quality of the company’s management

Question 10

How does choice of individual funds within a portfolio affect the risk-reward ratio?

Answer 10

By selecting funds with a risk-reward ratio lower or higher than the market average, an adviser can reduce the prospective returns and volatility of the portfolio

Question 11

Why may an investor with a higher risk profile be interested in VCT’s, EISs and SEIS schemes?

Answer 11

May be attractive for the tax advantages they offer

Question 12

What is the minimum reporting period for a portfolio under MiFD11?

Answer 12

every three months

Or if the fund falls by 10% or more within a reporting period

Question 13

What are the two main categories for ivestment solutions?

Answer 13

Investments that maximise returns for a given level of risk - i.e. collective investments, OEICs, UT’s, investment trusts, discretionary managed accounts

Investments designed to match future liabilities - i.e. DB pension funds, life assurance, general insurance, investment funds that meet specifc income requirements

Question 14

What are the 5 risk classes?

Answer 14

No risk
Low risk - cautious
Medium risk
Medim high risk
High risk

Question 15

What are the specified terms for return objectives?

Answer 15

Capital preservation
Capital appreciation
Current Income
Total return

Question 16

What are the constraints that need to be considered in terms of the impact on a clients investment?

Answer 16

Time Horizon
Liquidity
Tax
Legal and regulatory factors
Unique needs and preferences

Question 17

What are the differnt approaches an adviser could use to establish a clients capacity to take risk?

Answer 17

Printed questionnaires
Computer based assessments
Psychometric profiling
numercial scales
Open discussions
Graphical presentations

Question 18

What factors does an adviser need to take into account when projecting portfolio cash flow with a client?

Answer 18

Initial yield on investments
overall rate of income generated
likely level of inflation and interest rates
probable rate of growth in company dividends

Question 19

Indentify two constraints that will have an impact on an investors ability to tolerate risk?

Answer 19

The time horizon of the investor and thier liquidity requirements will affect their ablity to take on risk

Question 20

How might a client take advantage of accumulation and decumulation of assets?

Answer 20

When markets are weak, drawing less funds means less units are cancelled to pay for income requirements, when markets are strong money could be ‘taken off the table’ by taking a higher value to maximise the high price of units