Mortgage and Investment Strategies Quiz

Learning Objectives for Topic 14: Advice

• Advisers must understand the know your client requirements of the FCA
• Advisers need to ensure they give clients suitable advice
• Key factors considered include the client's risk attitude, objectives, financial circumstances, timescale, amount, diversification/balance, asset allocation, tax position, and socially responsible investment
• Ongoing reviews are essential

FCA Regulation: Financial Advice Principles

• Financial advice must be based on thorough knowledge of the client's relevant information
• Advisers must act fairly and in the client's best interests (FCA principles)
• The client's investment needs change throughout their life, with different objectives at different stages (e.g., saving during early life, investing capital for income later in life)

Robo-advice

• Robo-advice is designed to meet the basic needs of clients who can't afford standard fees
• It uses an online questionnaire to recommend client-suitable portfolios or products
• Automated advice or used in conjunction with human support
• Increase in robo-advice is encouraged to help new entrants and encourage innovation

Factors to Consider: 'Know Your Client'

• Review figure 14.1 for key considerations
• Ethical attitude, tax position, risk, objectives, customer considerations, asset allocation, current and future circumstances, diversification & balance, amount, and timescale
• Client's attitude to risk is a primary consideration when making recommendations
• Consideration of client objectives, especially with regard to capital vs. income and whether the client wants income immediately or in the future or at a specified time.
• The client's ability to withstand possible losses must be investigated and discussed clearly with the investor.

Client's Capacity for Loss

• How a loss of investment money may affect a client's life and living standards
• Considerations for existing debts, future capital needs or obligations (e.g., upcoming expenses like school fees or property purchases)
• The nearer a client is to retirement, the less capacity for loss is typically considered
• Adviser must ensure the client understands exactly all the considerations regarding capacity for loss.

Establishing Client Attitude to Risk

• Explaining different types of risk (e.g., risk to capital, risk to income, and comparisons between deposit vs. shares)
• Consideration of the timing of investment (short-term vs. long-term) and whether the objective of the investment might be affected by this
• Client's preference is considered regarding any particular investment

Portfolio Approach

• Adviser presents hypothetical portfolios (low risk/low return, medium risk/medium return, high risk/high return) composed of specific investment products, to gauge the client's risk tolerance
• Clients' attitude to investment risk is categorized as risk averse, low risk, medium risk or speculative depending on their profile

Client's Objectives

• The client's objectives are a significant factor in determining their risk tolerance
• Specific objectives (e.g., loan repayment, school fees) require a more conservative approach
• Longer-term objectives (e.g., retirement) might afford a more speculative approach if necessary
• Adviser must ensure there are realistic levels of expectation regarding each objective for each investment, and that each objective can be met within the timeframe and/ or that the client understands that not all objectives will be met within the expected timeframe.

Time Horizon

• The investment timeframe impacts the acceptable level of risk
• Short-term objectives necessitate less risk and more liquid investments
• Longer-term objectives allow for more speculative investments

The Amount

• The size of the investment influences the degree of risk acceptable (larger investment = potentially more speculative)
• Maintaining an emergency fund (e.g., 3-6 months income/expenditure, 10% of capital) is crucial for any investment strategy

Client's Tax Position

• Taxes can significantly impact investment decisions; need to account for current and potential tax implications
• Tax-efficient investment methods should be considered to mitigate the impact of taxes
• Tax legislation is subject to change

Sustainable Investment

• Many investors prioritize investments with positive environmental, social, or governance (ESG) factors
• Negative and positive screening processes are used in ethical investment
• Engagement with investee companies may also be considered

Ongoing Portfolio Reviews

• Reviews and portfolio adjustments are important as circumstances, client needs, market conditions will change
• Advisers need to match the client's changing needs with their new objectives and risk profiles
• There is value in frequent reviews to prevent the portfolio falling out of alignment with client objectives

Ethical Investment Indices

• FTSE4Good indices illustrate the performance of ethical companies and their social and environmental impact
• Indices include geographical-specific data to provide accurate performance measures for various markets