1
Q
For later life planning, what is equity release?
A
Borrow money against value of home
2
Q
What are two main types of equity release?
A
Lifetime mortgages and home reversion plans.
3
Q
What are the typical reasons for equity release? (4)
A
- Repay existing mortgage
- Carry out home improvements
- Consolidate debts
- Paying for help around the home
4
Q
What are the features of lifetime mortgage? (2)
A
- No monthly repayments.
- Interest accumulates until loan is repaid when person dies or moves into care
5
Q
For lifetime mortgages, the amount that can be borrowed depends on: (4)
A
- Value of the property
- Age (the older you are the greater the cash sum that can be released)
- Health
- Meeting the provider’s affordability criteria
6
Q
What are the main costs associated with equity release? (4)
A
- Advice fees
- valuation fee
- legal fees for conveyancing
- Application fee
7
Q
What are the benefits of lifetime mortgages? (4)
A
- Mortgage + accrued interest only repaid when home sold
- Interest rates are fixed
- ‘No negative equity’ - liability cannot exceed value of home
- can have initial cash lump sum and borrow further if needed
8
Q
What are the risks of lifetime mortgages? (4)
A
- Could be more expensive than traditional mortgage
- Consolidating debts over a longer period may mean paying more overall
- May affect tax position and entitlement to benefits
- Estate/inheritance decrease
9
Q
What is a home reversion plan?
A
Release equity and remain in the property rent free but the provider purchases all or part of the house
10
Q
For home reversion plans, the amount received for the part sale of the house depends on: (3)
A
Property’s value
Age
Health
11
Q
how much equity is usually released in home reversion plans?
A
Between 20% - 60% of market value of home
12
Q
Why are home reversion plan payments usually discounted?
A
Amount received discounted for rent-free tenure or until person goes into long-term care
13
Q
What is the average care cost and how fast is it rising? (2)
A
- Residential care over £34k per year
- Nursing home care £49k per year
- Fees rising at above-inflationary rates
14
Q
What are the three alternatives to self-funding care home fees? (3)
A
- There is Local authority funding - if wealth below £23,350
- NHS can cover cost of care home if have complex health needs but hard to get
- Staying at home - depending on the level of care needed
15
Q
What happens to clients who ‘give away’ assets to avoid care home costs? (2)
A
- treated as a deliberate deprivation of assets by local authority
- HMRC will assess person’s resources as though they still owned the asset
16
Q
What are the FCA guidance on vulnerable clients? (5)
A
1.Act with appropriate levels of care
2. Understanding vulnerability
3. Skills and capabilities of staff
4. Service design, customer service and communications
5. Monitoring and evaluation (ICS)
17
Q
What is the difference between financial planning and financial advice?
A
- ongoing process to achieve money and life goals
- one off recommendation in time
18
Q
What are the six steps to financial planning?
A
- Establish client relationship
- Collect relevant information
- Analyse information
- Develop investment strategy
- Implement client and portfolio management
- Review and update
19
Q
What is involved in effective communication? (8)
A
- Determine whether client requirements are within the range of services offered
- Outline of the process
- Whether advise from other professionals is required
- Establish rapport
- Mix of open and closed questions to establish client needs
- Explain technical jargon
- Listening
- Establish client trust
20
Q
What helps with establishing client trust? (3)
A
technical competence, ethical conduct, empathic skills
21
Q
What information is required to understand client circumstances? (3)
A
Financial understanding
Socio-economic characteristics
Financial situation
22
Q
What is included in socio-economic characteristics? (6)
A
- Gender
- Dependants
- Health
- Lifecycle stages
- Income
- Occupation
23
Q
What is included in financial situation? (6)
A
- Tax status
- Retirement arrangements
- Human capital
- Insurance
- Potential inheritance
- Ethical and social investments
24
Q
What does it mean to be a risk-averse investor?
A
take the minimum risk to achieve desired return
25
What are the three main types of risk tolerance to understand client response to risk?
Risk perception - personal opinion
Risk capacity - ability to absorb financial loss
Risk tolerance - willingness to take risk
26
Which risks are subjective and/or objective?
Risk perception - subjective
Risk capacity - objective
Risk tolerance - subjective and objective
27
What are the different return expectations? (4)
1. Return in line with risk objective
2. Real vs. nominal
3. pre-tax vs. post-tax
4. Desired vs. required return
28
What are the different types of investment objectives? (4)
1. Capital preservation
2. Income objective
3. Growth of income objective
4. Capital appreciation objective
29
What are the different setting and implementing investment objectives? (4)
1. Target replacement income objective
2. Benchmark-driven return objective
3. Best-efforts basis
4. Liability driven return objective
30
What are the four different types of investment constraints?
1. Time horizon
2. Liquidity
3. Taxation
4. Unique circumstances
31
What are the different types of behavioural biases? (2)
1. Emotional biases
2. Cognitive errors
32
What are the sub-types of cognitive errors?
1. Belief perseverance biases
2. Information processing biases
33
What are the different belief perseverance biases? (3)
1. Cognitive dissonance
2. Representative-ness
3. Local bias
34
What are the different information processing biases? (5)
1. Anchoring
2. Mental accounting
3. Framing
4. Availability
5. Naive diversification
35
What the different emotional biases? (7)
1. Loss aversion
2. Overconfidence
3. Gamblers fallacy
4. Self-control bias
5. Investment inertia
6. Endowment bias
7. Regret aversion
36
What is Cognitive Dissonance (confirmation bias)?
Look for what agrees with beliefs and reject what contradicts beliefs
37
What is Representativeness bias?
Classify new information based on past experiences and stereotypes
38
What is Local (home) bias? (2)
1. Tendency to invest in stocks of local companies
2. Belief in information advantage of home stocks
39
What is anchoring?
Use of an initial default number ('anchor')
Reluctant to change based on new information
40
What is mental accounting bias?
Treating one sum of money different to another equal sum of money
41
What is framing bias?
The process of information is dependent on how the decision is framed
42
What is availability bias?
Decisions can be biased towards events that come to mind easily
43
What is naive diversification?
If presented with choices simultaneously, preference to take equal amounts of each
44
What is loss aversion and implication to investing ? (3)
1. avoiding losses > achieving gains
2. Hold on to losers
3. lock in profits early
45
What is overconfidence and implication to investing?
1. Overestimate own abilities
2. Can lead to excessive trading and overestimating expected returns
46
What is gambler's fallacy?
Making decisions on the assumption on mean reversion
47
What is self-control bias and its implication in investing?
1. A lack of self discipline
2. thinks short-term satisfaction than long-term goals
48
What is investment inertia?
Status Quo: Do nothing, keep things as they are
49
What is endowment bias and its investing implication?
1. People place more value on assets they own
2. Dont want to sell and buy new ones
50
What is regret aversion?
Actions taken in fear of making wrong decision
51
What is prospect theory?
Decisions will be based on perceived gains and losses
52
How is loss aversion included in prospect theory? (2)
1. inconsistent attitude to risk
2. protects gains but reluctant to realise losses
53
What are some important things to know about interim losses? (3)
- May not impact standard of living
- May not mean less at end of investment horizon
- Three year tipping point
54
How is regret aversion included in prospect theory? (3)
1. Avoid stocks with poor past performance
2. Hold onto losers than admit mistake
3. Favour consensus (Herding)
55
How is mental accounting included in prospect theory? (3)
1. Put assets in different pots and make different decisions for each
2. Pots have different objectives
3. Failure to consider entire portfolio as a whole
56
How do noise traders perform against information traders? (3)
1. If assume rational and well informed investor (EMH)
2. Noise traders will tend to lose wealth compared to informed traders
3. Noise traders contribute little other than offering arbitrage potential
57
What analysis do information traders use?
Use fundamental analysis and make rational decisions
58
What analysis do noise traders use?
Use technical analysis and make decisions based on sentiment/trends
59
How can you work around the impact of behavioural biases on financial planning? (3)
1. Start with efficient portfolio
2. educate to reduce impact of bias
3. or adapt to bias and work with it
60
What is the difference on working with cognitive biases and emotional biases?
Cognitive biases are easier to change (educate) than emotional biases
61
What are the numbers required to analyse a client's financial position? (4)
1. Net assets statement
2. Cash flow statement
3. Tax analysis
4. Lifetime cash flow projections
62
What are the assumptions needed to analyse a client's financial position? (5)
1. Inflation and interest rates
2. Life expectancy
3. Annuity/drawdown rates
4. Increases in expenditure
5. Retirement date
63
What do firms have to do in terms of suitability and its effect on portfolio construction ? (2)
1. Make recommendations, or decisions to trade that are suitable for the client
2. Suitability should be considered at the portfolio level in addition to the asset level
64
When does suitablity apply in wealth management? (2)
1. Making personal recommendation
2. Acting as investment manager
65
When does suitablity not apply in wealth management?
Does not apply to execution-only business (appropriateness - complex products)
66
What are the three main elements to suitability?
1. Experience and knowledge
2. Financial situation
3. Objectives:
67
For suitability' what does 'financial situation' of a client entail?
Can they bear the investment risk
68
For suitability 'what does 'experience and knowledge' of a client entail?
Understanding risks of the portfolio
69
For suitability what does 'objectives' of a client entail? (4)
1. Risk preference
2. investment horizon
3. risk profile
4. investment objective
70
What are the features of good suitability reports? (4)
1. Provided once suitability is established
2. Explains why product is suitable to meet objectives
3. Must not be misleading
4. written by someone authorised
71
What should a suitability report do as a minimum? (3)
1. Specify clients demands and needs
2. Explain why recommendation is suitable
3. Explain any possible disadvantages
72
What is the role of the investment policy statement (IPS)?
ALASTTIIRR
1. Asset allocation
2. Liquidity requirements
3. Any other factors
4. Selected benchmark
5. Time horizon
6. Tax position
7. Investment strategy
8. Investment objectives
9. Risk profile
10. Restrictions
73
What are the different investment solutions (investment funds) available to invest in for clients? (3)
1. Mutual funds
2. Fund of funds
3. Manager of managers
74
What should be considered when investing in multi-manager funds?
Extra layer of costs with multi-manager funds
75
What other considerations should be made in suitability reports? (8)
1. Tailored to the customer
2. Highlight the risks associated with the recommendations
3. Explain any costs, charges and penalties
4. Confirm the clients attitude to risk and capacity for loss
5. Provide a balanced view
6. Highlight any objectives that have been omitted
7. Emphasise how the client will be advantaged or disadvantaged
8. Contain a statement about the importance of the review process and the cost of advice (if not previously agreed)
76
What is a of funds of funds and the two different types? (3)
1. One overall fund manager which invests in a portfolio of other investment schemes
2. Unfettered basis uses funds external to the fund manager
3. Fettered basis obliged to use internal funds
77
How does manager of managers work? (3)
1. Does not invest in other investment schemes
2. Instead the fund manager arranges segregated mandates
3. Appoints fund managers to manage each pool
78
What are the two different types of discretionary investment management?
model portfolio basis or bespoke service for HNWI
79
How much discretion does an investment manager have for bespoke service clients?
Level of 'discretion' detailed in investment mandate
80
What is a model portfolio’s investment objective? (2)
1. Returns to meet or exceed a benchmark
2. Eg MSCI (PIMFA) private investor indices
81
What is SAA?
Not what it stands for 😂
Long term weightings required to meet clients objectives
82
What should be considered with SAA?
Consider within context of other holdings
83
What are the two different approaches to SAA?
Both quantitative (MVO) and qualitative (SRI) approaches may be taken
84
Why does SAA need rebalancing?
Overtime weightings become out of sync with SAA
85
When do you rebalance SAA?
Set tolerance levels and rebalance when holdings become out of tolerance
86
What are the different methods to set strategic weights? (4)
1. Use an index
2. Copy peer group
3. Use optimisation models
4. Asset liability matching
87
What does tactical asset allocation do? (2)
1. Exploit pricing anomalies (market timing)
2. Chases Alpha by under/over weighting asset classes relative to SAA
88
What kind of strategy is TAA?
It’s an overlay strategy if permitted in IPS allowing temporary changes to SAA
89
What are the different approaches to tactical asset allocation? (3)
1.Relative valuation approach
2. Cyclical approaches
3. Use of futures to increase/decrease the portfolio beta or duration
90
What is involved in the relative valuation approach to TAA? (2)
1. Intrinsic value vs. market value
2. Risk premium approach (spread)
91
What is involved in the cyclical approaches to TAA?
Considers spreads and how they may change to signal switch between equity and bond market
92
What are the features of active management? (2)
1. Make active decisions on asset allocation
2. use research techniques to find inefficiencies and beat the benchmark
93
What are the disadvantages of active management? (2)
Increased costs and inconsistency in excess returns
94
What are the different types of active management? (6)
1. Top down
2. Bottom up
3. Growth
4. Value
5. GARP (blend investing)
6. Hybrid (Index tilting/Core-satellite/Completeness portfolio)
95
What is involved in passive management?
Use index funds to minimise tracking error
96
What are the different methods to passive management? (3)
full replication, stratified sampling, or optimisation
97
What are the reasons in favour of passive management? (2)
Fund manager expertise & lower cost
98
What are the reasons against passive management? (5)
1. Tracking error
2. Rebalancing
3. Lack of Alpha
4. Little control
5. Alignment of objectives
99
What does the 'social' aspect of ESG cover? (3)
1. Minimum wage
2. Health and safety
3. Corporate Social Responsibility (CSR) - e.g. Tax loopholes
100
What does the 'environmental' aspect of ESG cover? (3)
1. Waste
2. Mining activities
3. Use of scarce resources
101
What is included in the Global Sustainable Investment Alliance (GSIA) Definitions?
CISPINN
1. Corporate engagement and shareholder action
2. Integration of ESG factors
3. Sustainability themed investing
4. Positive screening/Best in class
5. Impact/community investing
6. Negative screening
7. Norms-based screening
102
What is being done to mitigate the risk of greenwashing?
Setting stewardship codes and regulations that aligns with global/national targets on climate change
103
What does the 'governance' aspect of ESG cover? (3)
1. Weak internal controls
2. Irresponsible behaviour
3. Corruption
104
What is greenwashing?
Misleading information about products being "environmentally friendly" or have "positive environmental impact"
105
What have been the criticisms on ethical investing and its performance? (7)
1. Using 'green' and 'ethical' labels indiscriminately to attract customers
2. Higher fees
3. Sluggish performance/although improvement in recent years
4. Keeping their holdings secret
5. May not publish ethical criteria
6. Can be highly exposed to small company and to growth-orientated stocks
7. Market sentiment can turn causing reputational damage
106
What is philantrophy?
Donating money, goods and effort to support a socially beneficial cause
107
What causes are usually supported in philantrophy? (4)
1. medical research
2. humanitarian aid
3. arts
4. education
108
Why has philantrophy become more popular? (2)
1. Significant growth in wealth
2. Increase in the number of self-made millionaires
109
What are the services provided by wealth managers regarding philantrophy? (4)
1. Setting up charitable trust
2. Advising on tax benefits
3. Introducing to other philanthropists
4. Connecting donors to charities
110
What are the features of impact investing? (2)
1. Want social and environmental impact + financial return
2. Meet SRI goals while growing overall endowment
111
What is the social investment tax relief (SITR) on income tax? (2)
1. Relief of 30% of investment (up to £1M) in the current or previous year
2. Tax reducer
112
What is the social investment tax relief (SITR) on CGT?
CGT exempt & CGT deferral relief
113
How did charities traditionally invest their funds?
to generate funds for future initiatives
114
What changes did the Charities Act 2016 introduce?
Introduced a new statutory power for charities to make social investments
115
What does social investment mean for charities?
Invest to further the charity's cause + financial return
116
What is an extra consideration in social Investment re charity trustees/philanthropists?
Are the social investments (SI) in the best interests of the charity
117
How do you assess a social investment? (9)
1. Expected financial return
2. Expected mission benefit
3. Costs (foregone mission benefit)
4. Preservation of capital for future beneficiaries if using permanent endowment for SI
5. How the SI fits into the overall investment portfolio
6. How the performance of the SI will be measured/monitored
7. Risks of the SI failing to deliver
8. Duration of the SI (exit route)
9. Relationship between the SI provider and the charity
118
What are the considerations for a philanthropist when setting up a foundation? (3)
1. Need to invest a minimum of $10M
2. More control over how investment used
3. Cost of experts
119
What are the costs of experts when setting up a foundation for a philantrophist? (3)
1. Administration/regulations
2. Investment expertise
3. Experience to implement vision
120
What does the Association of Charitable Foundations (ACF) do? (2)
1. Aims to provide support for grant-making trusts and foundations
2. Provides framework so foundations can learn from each other
121
What does the Charities Aid Foundation (CAF) do?
Helps with registration of charitable foundations through the CAF Global Trustees service
122
What does a philantrophis need to consider when making a donation to an existing charity? (6)
1. Experience in mission activities
2. Reputation
3. Longevity
4. Less control
5. Bureaucracy
6. No financial return
123
What does a philantrophist need to consider regarding impact investing / social investing? (7)
1. Experience in mission activities
2. Reputation
3. Longevity
4. Less control
5. Bureaucracy
6. Benefit of potential financial return
7. Expertise in products available
124
What are the features of WealthTech? (4)
1 use technology to provide wealth management services
2. deal with financial matters directly
3. Online platforms helps automation
4. Robo-advice
125
What are the benefits of robo-advice? (3)
1. Requires low initial investment
2. Charge low fees (below 0.5% of AUM)
3. Accessible to a wider range of investors
126
What are the risks of WealthTech? (3)
1. Complex and risky product offered (crypto assets)
2. Lack of regulation
3. Use of gamification
127
What is involved in the gamification in WealthTech? (3)
1. game design
2. Simplifies finance concepts
3. Targets younger to trade more
128
The FCA launched a 'digital disruption campaign' to mitigate risks in WealthTech. They have online advertising asking what questions? (5)
1. Comfortable with risk?
2. Uderstand the investment?
3. Am I protected if things go wrong?
4. Are my investments regulated?
5. Should I get financial advice?
last dance
flashcards
Decks in class (8)
# Cards
