Chapter 5

Chapter 5

Question 1 of 18

1

Which of the following types of investment incurs a liability for capital gains tax once sold?

Select one of the following:

  • Classic car

  • Government bonds

  • Units in unit trusts

  • Primary residence

Explanation

Question 2 of 18

1

Which of the following implications will help to ensure financial advisers act in their clients'
best interest?

Select one of the following:

  • Firms that give investment advice must address the potential for adviser remuneration to
    distort consumer outcomes

  • Investment firms will need to switch clients into products that have no trailing
    commissions

  • Firms that give investment advice must charge fees within a guidance range set by the FCA

  • Investment firms will need to change their price lists to remove all percentage based fees

Explanation

Question 3 of 18

1

What are the possible implications for investment performance of investing in an ethical fund?

Select one of the following:

  • The fund may be more volatile because of the increased exposure to smaller company
    holdings

  • Ethical funds invest primarily in large companies producing lower total returns

  • There are no suitable benchmarks for the client to measure performance against

  • Total returns are likely to be higher due to the increased level of diversification in ethical
    funds

Explanation

Question 4 of 18

1

Jackie is a private client investor and you ascertain that her investment objective and risk
tolerance are capital growth and cautious. During the meeting she asks you for your thoughts
on the use of derivatives. You respond that, in your opinion, derivatives:

Select one of the following:

  • are normally appropriate only where there is a high risk tolerance

  • only generate an income stream and so are not compatible with her objective

  • can generate capital growth and are suitable where there is a low risk tolerance

  • can be traded only on an execution only basis as firms cannot offer any advice or opinion

Explanation

Question 5 of 18

1

Which of the following rules applying to financial intermediaries is directly underpinned by the
principle of fiduciary responsibility?

Select one of the following:

  • Commission disclosure

  • Money laundering

  • Professional indemnity

  • Best execution

Explanation

Question 6 of 18

1

Corporation tax is a factor when considering investment as it can:

Select one of the following:

  • block investment opportunities

  • differ between countries

  • be deferred indefinitely

  • be subject to a different accounting period

Explanation

Question 7 of 18

1

When recommending an investment product to a client, what material information MUST the
adviser disclose in order to satisfy the fiduciary relationship that exists between the two
parties?

Select one of the following:

  • Only details which have been specifically requested by the client

  • Whatever is needed to produce a guaranteed return

  • Only details which are considered to affect the investment risk

  • Whatever is needed in order for the client to make an informed decision

Explanation

Question 8 of 18

1

An independent financial adviser would make recommendations on which type of product?

Select one of the following:

  • The firm's own products

  • Products of one other provider

  • Products from across the market place

  • A range of products from a limited number of providers

Explanation

Question 9 of 18

1

A consumer purchases a designated investment and the firm provides the consumer with
detailed cancellation rights over the telephone, immediately after the purchase. How has the
firm contravened the rules?

Select one of the following:

  • Designated investments require notice of cancellation rights to be signed by the customer

  • Cancellation rights must be given in writing

  • Consumers must be informed of cancellation rights before a purchase is confirmed in all
    cases

  • Consumers must receive cancellation rights in writing before identification checks are
    undertaken

Explanation

Question 10 of 18

1

Which is the MOST important reason for an adviser to conduct regular reviews of a client's
circumstances and arrangements?

Select one of the following:

  • To help the client complete any tax documentation

  • To ensure that the adviser complies with any regulatory requirements

  • To ensure that any products continue to meet a client's needs

  • To ensure that the adviser retains any repeat business from the client

Explanation

Question 11 of 18

1

Paulo is a non-resident investor. How is he likely to benefit from a double taxation treaty?

Select one of the following:

  • By incurring tax at a reduced concessionary rate

  • By opting for the country with the lowest tax rate

  • By avoiding the need to register with the tax authorities

  • By obtaining a refund of withholding tax

Explanation

Question 12 of 18

1

When conducting investment business for a private customer, what must a firm do?

Select one of the following:

  • Only invest in products that are classified as low risk

  • Make the customer aware of costs and commissions

  • Meet face to face with the client

  • Disclose the underlying investments in the investment products

Explanation

Question 13 of 18

1

Which of the following would provide the lowest level of risk for risk averse investors with
short term horizons?

Select one of the following:

  • Long term gilts

  • Cash deposits

  • Ordinary shares

  • Warrants

Explanation

Question 14 of 18

1

How does asset allocation help meet a client's needs?

Select one of the following:

  • It enables clients to invest wholly in one of the MAIN asset classes to maximise returns

  • It reduces the investor's risk by investing across a range of asset classes, sectors and individual stocks

  • It provides a benchmark for a client to assess how well his investments have performed

  • It enables investors to pool their investments with others and reduce the risk of direct
    investment in shares

Explanation

Question 15 of 18

1

Which of the following is a factor that must be considered when constructing a portfolio?

Select one of the following:

  • Verification of the client's identity

  • The client's risk tolerance

  • The category of investment service required

  • Performance measurement

Explanation

Question 16 of 18

1

If clients approach a firm knowing exactly which product they wish to purchase, and ask the
firm simply to arrange the purchase, this type of transaction is normally described as:

Select one of the following:

  • best advice

  • instruction processing

  • nominal dealing

  • execution only

Explanation

Question 17 of 18

1

Which mix of investments is most appropriate for a risk averse investor?

Select one of the following:

  • 50% commodities and 50% equities

  • 50% cash and 50% gilts

  • 50% foreign exchange and 50% CFD's

  • 50% property and 50% PIBS

Explanation

Question 18 of 18

1

The relationship between an adviser and a client means that the adviser has a duty to:

Select one of the following:

  • ensure suitable compensation is available if the client suffers a loss

  • check with a third party before providing advice to the client

  • report any wrong-doings to the authorities

  • always act in the best interests of the client

Explanation

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