What are the two main types of investors?
Retail and institutional
How does the FCA categorise retail investors?
According to their wealth, and experience in order to restrict promotions of, and investments in, riskier types of investments
What are the treating customers fairly (TCF) six outcomes?
- consumers can be confident they are dealing with firms where the fair treatment of customers is central to corporate culture
- products and services marketed and sold in the retail market are designed to meed the needs of identified consumer groups and targeted accordingly
- consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale
- where consumers receive advice, the advice is suitable and takes account of their circumstances
- consumers are provided with products that perform as firms have led them to expect and the associated service is of an acceptable standard as they have been led to expect
- consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint
What are the three main factors affecting an investor’s needs/objectives?
- Time horizon
- Return requirement
- Risk tolerance
What are other factors affecting a client’s needs
- Liquidity
- Tax
- Regulatory requirements
- Religious/ethical restrictions
Describe a client’s financial objectives
Establishing a client’s objectives is a vital first stage in the financial planning process. Financial objectives should be quantified in terms of both how much is required and when. Some objectives may need to be prioritised and amended in light of affordability.
Describe a client’s current circumstances
Collecting data regarding a client’s current circumstances is a key stage in financial planning. A fact-find gathers hard facts and soft facts about clients. It may be necessary to clarify details with third parties where a letter of authority will be needed
Describe a client’s risk profile
Clients often have limited understanding of investment risk and tend to focus on capital risk. Other risks, such as inflation risk, interest rate risk and shortfall risk may need to be explained to them. Diversification is a way of limiting risk due to the different exposure to the various types of investment risk.
What are the key factors that affect a client’s risk profle?
Key factors that affect a client’s risk profile are timescale of the investment amount of risk capital, investment experience and psychology.
How many steps to the financial planning process?
Contains six main steps, including reviews of the plan after it is implemented
What is the main driver of performance?
Asset allocation is the main driver of performance, and must be appropriate to the client’s objectives and risk profile
What should be taken into account when selecting a fund?
Past performance, charges and if relevant the financial strength of the provider
What can performance be measured against?
It can be measured in absolute terms of return, but is more meaningful when benchmarked against the performance of a similar investment or fund manager
What should a fact-find capture?
All pertinent details, including current and future circumstances, objectives, current and expected income levels, expenditure, current financial status, entitlement of benefits and risk profile
What should advsers ascertain?
Whether a client has sufficient emergency funds
What is good practice in terms of risk?
To explore all aspects of risk, including product risk and underlying risk as well as the circumstances where these risks might occur
What should be considered if client’s circumstances change?
Whether the advice provided remains suitable
What are the two main types of pension fund?
Defined benefit (DB) and defined contribution (DC)
What are pension funds exempt from?
Capital gains tax and income tax and their investment policy is generally determined by tax considerations
Describe the liabilities of pension funds
They are usually long-term in nature, and the asset mix of a fund will depend in part upon the maturity of the fund
Which other companies also have long-term liabilities?
Life assurance companies
Describe general insurance companies
They tend to have much shorter liabilities arising from the sale of contingency-specific insurance policies. The short-term liabilities of general insurance funds mean that these funds are more heavily focused upon shorter-term assets
Which funds are not tax-exempt?
Life assurance and general insurance funds
What are funds’ asset allocations primarily determined by?
By analysing the fund objectives (return and risk) and constraints (liquditiy, time horizon, tax, legal, regulatory and other specifics such as ethical constraints)
