Client relationships questions

Question 1

Question 1

4 benefits and 4 drawbacks of hourly and fund based fees

Answer 1

Hourly
Pro
Easier to understand/known cost
Familiar/same as other industries 
Based on actual work undertaken 
Fee cap can be negotiated 

Con
Adviser can run up the clock
Might put off clients if additional cost for extras
Made from personal fund/more admin cheque
Final cost is not known

Fund based
Pro 
Maybe to negotiate lower fees 
Adviser incentive to grow funds 
Provider pays, less admin 
Lower fee for lower investment amount 

Cons
Fees might reduce outperformance 
May not reflect work undertaken 
Have to pay extra for extra services 
Difficult to predict costs incurred over the year

Question 2

Question 2

Benefits to Simon and Grace of receiving financial advice

Answer 2

1. Conduct regular reviews of existing assets
2. Review suitability of his existing premium bonds
3. Review tax efficiency of existing investments
4. Help achieve retirement objectives for Simon to go at 60
5. Advice on repayment of mortgage before retirement age and in case of death or serious illness and unable to work
6. advice on suitability of existing protection in event of first death mortgage and serious illness
7. review existing contracts and charges and recommend better costing alternatives
8. Ensure existing arrangements tax efficient as possible and utilise carry forwards and exemptions IHT
9. Give advice on funding uni fees and how to take funds from offshore bond efficiently
10. determine income shortfall in retirement and put a plan in place to fund to over come this increase ER cons
11. suitability existing investment and pension strategy and recommend fund switches if required

Question 3

Question 3a

Factors and assumptions when formulating a cash flow model:

Answer 3

Expected:
Income
Expenditure 
Gifting
Longevity 
Growth rate returns for investments 
Need LTC costs 

Use of tax free wrappers
ATR
Inflation 
Retirement age 
Assumptions for fees/charges

Question 4

Question 3b

Benefits of cash flow modelling:

Answer 4

-Compare income before and after retirement
-Stress test different scenarios -understand impact of various events
-Assumptions for inflation and investment growth
-identity shortfalls +put plans in place to address
-can adjust results to be meaningful
—determines suitable asset allocation

Question 5

Question 3c

Risks of relying on cash flow modelling:

Answer 5

• Assumptions may be incorrect
• tax/legislation may change
• cash returns are linear -straight line
• objectives and circumstances change
• risk systematic/political and market hard to take account of
• liquidity not taken into account

Question 6

Question 3D

6 scenarios of stress testing cash flow forecasts

Answer 6

• Loss income/capital (market crash)
• large unplanned capital withdrawal
• returns lower forecast
• income higher forecast
• inflation higher forecast
• living longer expected
• death/divorce changes in personal circumstances

Question 7

Question 4

Factors that determine Grace and Simons capacity for loss.

Answer 7

• Em fund-they have sufficient and lots of cash
• ATR- S is high and G is Med -can absorb volatility
• Mortgage term-extends 9 years past retirement no life policy to repay on 1st death

-Inc pro -they have regular income butte one loses job, income shortfall. S ASU policy
inadequate and G has no inc pro -only DIS

Retirement income-they need to save enough for retirement in 15 yrs

-Dependent kids -until E finishes uni 5 years