THE CHARTERED INSURANCE INSTITUTE. Diploma in Financial Planning SPECIAL NOTICES

Transcription

1 THE CHARTERED INSURANCE INSTITUTE J11 Diploma in Financial Planning Unit J11 Wrap and platform services Specimen Examination Guide SPECIAL NOTICES Candidates entered for the October 2012 examination should study this specimen examination guide carefully in order to prepare themselves for the examination. All questions in the October 2012 paper will be based on English law and practice applicable in the tax year 2012/2013, unless stated otherwise, and should be answered accordingly. Practice in answering the question is highly desirable and should be considered a critical part of a properly planned programme of examination preparation.

2 J11 Wrap and platform services Contents Important guidance for candidates 3 Question paper 7 Model answers 11 Published April 2012 Telephone: Fax: customer.serv@cii.co.uk The Chartered Insurance Institute 2012

3 Introduction IMPORTANT GUIDANCE FOR CANDIDATES The purpose of this Specimen Examination Guide is to help you understand how examiners seek to assess the knowledge and skill of candidates. You can then use this understanding to help you demonstrate to the Examiners that you meet the required levels of knowledge and skill to merit a pass in this unit. During your preparation for the examination it should be your aim not only to ensure that you are technically able to answer the questions but also that you can do justice to your abilities under examination conditions. Before the examination Read the Diploma in Financial Planning information for candidates and important notes for candidates Details of administrative arrangements and the regulations which form the basis of your examination entry are to be found in the current Diploma in Financial Planning Information for Candidates and important notes for candidates, which is essential reading for all candidates. It is available online at or from Customer Service. Study the syllabus carefully It is crucial that you study the relevant syllabus carefully, which is available online at or from Customer Service. All the questions in the examination are based directly on the syllabus. You will be tested on the syllabus alone, so it is vital that you are familiar with it. Read widely It is vital that your knowledge is widened beyond the scope of one book. It is quite unrealistic to expect that the study of a single coursebook will be sufficient to meet all your requirements. While books specifically produced to support your studies will provide coverage of all the syllabus areas, you should be prepared to read around the subject. This is important, particularly if you feel that further information is required to fully understand a topic or an alternative viewpoint is sought. It is vital that your knowledge is widened beyond the scope of one book. The reading list which can be found with the syllabus provides valuable suggestions. Make full use of the Examination Guide The best way to understand what the examiners require is to study the CII Examination Guides. You can purchase copies of Examination Guides online at CII members can download free copies of past Examination Guides online at This guide and previous Examination Guides can be treated as mock examination papers, attempting them under examination conditions as far as possible and then comparing your answers to the model ones. The examiner s comments on candidates actual performance in each question should be noted carefully. Note the assumed knowledge For the Diploma in Financial Planning, candidates are assumed to have already the knowledge gained from studying the relevant units of the Certificate in Financial Planning or the equivalent. 3

4 Understand the nature of assessment Assessment is by means of a two-hour written paper. This Specimen Examination Guide contains a full examination paper and model answers. The model answers show the types of responses the examiners are looking for and which would achieve maximum marks. However, you should note that there are alternative answers to some question parts which would also gain high marks. For the sake of clarity and brevity not all of these alternative answers are shown. Know the structure of the examination The examination is made up of Section A, consisting of short answer questions, and Section B, consisting of 2 essay questions. The allocation of marks between the 2 essays may vary slightly from session to session. The paper will carry a total of 110 marks. Each question clearly shows the maximum marks which can be earned. 4

5 In the examination Assuming you have prepared adequately, you will only do justice to yourself in the examination if you follow two crucial common sense rules: 1. Spend your time in accordance with the allocation of marks as indicated on the paper. The maximum marks allocated to each question and its constituent parts are given on the paper; the number of marks allocated is the best indication of how much time you should spend on each question. If a question has just two marks allocated, there are likely to be only one or two points for which the examiner is looking, so a long answer is a waste of time. Conversely, if a question has 12 marks allocated, a couple of lines will not be an adequate answer. Always remember that if the paper is not completed, your chances of passing will be reduced considerably. Do not spend excessive time on any one question; if the time allocation for that question has been used up, leave some space, go on to the next question and only return to the incomplete question after you have completed the rest of the paper, if you have time. 2. Take great care to answer the precise question set. The model answers provided in this Specimen Examination Guide are quite focused and precise; alternative answers will only be acceptable if they still answer the question. However brilliantly a candidate writes on a particular topic, if it does not provide a satisfactory answer to the precise question as set, the candidate will not achieve the marks allocated. Many candidates leave the examination room confident that they have written a good paper, only to be mystified when they receive a disappointing result. Often, the explanation for this lies in a failure to think carefully about what the examiner requires before putting pen to paper. Order of tackling questions Tackle the questions in whatever order feels most comfortable. Generally, it is better to leave any questions which are felt to be very challenging until the more familiar questions have been attempted, but remember not to spend excessive time on the questions you are most confident about. Answering different question parts Always read all parts of a question before starting to answer it, otherwise, you may find that after answering part (a), the answer you have given is really more appropriate to part (b) and it would be necessary to duplicate much of what has already been written. The examiners will normally only give credit for an answer if it is contained within its correct question part. Handwriting Provided handwriting is legible, candidates will not lose marks if it is untidy. It is strongly recommended that candidates do not write in block capitals, because they will be slowed down so much by doing so. Answer format Unless the question requires you to produce an answer in a particular format, such as a letter or a report, you should use bullet points or short paragraphs, since this allows you to communicate your thoughts in the most effective way in the least time. The model answers indicate what is acceptable for the different types of question. Calculators If you bring a calculator into the examination room, it must be a silent battery or solar-powered nonprogrammable calculator. The use of electronic equipment capable of being programmed to hold alphabetical or numerical data and/or formulae is prohibited. You may use a financial or scientific calculator, provided it meets these requirements. It is important to show all the steps of your calculation in your answer. The examination is testing your ability to carry out all the appropriate steps in calculating a value. A proficient mathematician is someone who follows the correct method, i.e. carries out the appropriate steps. The majority of the marks will be allocated for demonstrating the correct method of calculation. 5

6 After the examination All examiners who mark Diploma in Financial Planning answer books are either active practitioners in the financial services industry or are experts on the subject. They have been specially trained to mark papers using a detailed marking scheme, the model answers in examination guides are based on those marking schemes. After each examiner has provisionally marked a small number of answer books, there is a co-ordination meeting or all the examiners at which the Senior Examiner goes through the marking scheme with the other examiners. Based on the feedback from the initial marking, the detailed marking scheme is finalised. The marking of each examiner is closely monitored by a Senior Examiner during the marking period and sampling of marked answer books is carried out. After all the answer books have been marked, a moderation meeting is held, at which all available statistical information is considered, together with the views of the Senior Examiner and other assessment experts. At the meeting a pass mark is set which should ensure that the standard of knowledge and skills required to pass the paper is comparable with that of previous papers. All candidates at or above the agreed pass mark will pass: the CII does not operate a quota system whereby only a fixed percentage of candidates can pass a paper. 6

7 THE CHARTERED INSURANCE INSTITUTE J11 Diploma in Financial Planning Unit J11 Wraps and platforms SPECIAL NOTICES Candidates are expected to be aware of the FSA regulation and guidance regarding wraps and platforms. All questions in this paper are based on English law and practice applicable in the tax year 2011/2012 unless stated otherwise in the question, and should be answered accordingly. Instructions Two hours are allowed for this paper. Do not begin writing until the invigilator instructs you to. Read the instructions on page 3 carefully before answering any questions. Provide the information requested on the answer book and form B. You are allowed to write on the inside pages of this question paper, but you must NOT write your name, candidate number, PIN or any other identification anywhere on this question paper. The answer book and this question paper must both be handed in personally by you to the invigilator before you leave the examination room. Failure to comply with this regulation will result in your paper not being marked and you may be prevented from entering this examination in the future. 7

8 Unit J11 Wrap and platform services Instructions to candidates Read the instructions below before answering any questions Two hours are allowed for this paper which consists of short answer questions and two essay questions, carrying a total of 110 marks. You are strongly advised to attempt all questions to gain maximum possible marks. The number of marks allocated to each question is given next to the question and you should spend your time in accordance with that allocation. Read carefully all questions and information provided before starting to answer. Your answer will be marked strictly in accordance with the question set. You may find it helpful in some places to make rough notes in the answer booklet. If you do this, you should cross through these notes before you hand in the booklet. It is important to show all steps in a calculation, even if you have used a calculator. If you bring a calculator into the examination room, it must be a silent battery or solar-powered nonprogrammable calculator. The use of electronic equipment capable of being programmed to hold alphabetic or numerical data and/or formulae is prohibited. You may use a financial or scientific calculator, provided it meets these requirements. Answer each question on a new page and leave six lines blank after each question part. Subject to providing sufficient detail, you are advised to be as brief and concise as possible, using note format and short sentences on separate lines where appropriate. 8

9 SECTION A Attempt ALL questions 1. Describe the main differences in how revenue is generated between platforms generally known as wrap platforms and those generally known as fund supermarkets. (9) 2. Briefly describe the terms of a typical agreement that must be in place between the client, the financial adviser and the wrap platform operator before the operator can facilitate payment of adviser charges from the cash reserve. (5) 3. Briefly describe the four methods of funding the client s cash account held in a wrap platform, which can be drawn on for the purpose of meeting initial and ongoing charges. (8) 4. A client is transferring the portfolio of a client s non-pension funds from one platform to another. (a) Describe the two methods of transfer (4) (b) Outline the tax consequences of each method (6) 5. An authorised firm of independent advisers uses a single platform for all their investment business. A new client wishes to invest in a new fund that is not available on their chosen platform. List the main options available to the firm in advising this client. (4) 6. A client has 30,000 to invest, List the main advantages of his adviser placing this on a platform compared to making a direct investment. (5) 7. List the main features and benefits of a corporate wrap. (9) Total marks available for this section: 50 9

10 SECTION B Attempt ALL questions 8. Explain the main benefits that platforms bring to the customers of financial advisory firms. (30) 9. A fee-charging independent financial advisory firm specialises in wealth management for individuals and trustees with investable assets of at least 500,000. The average portfolio of their clients is about 750,000 and it is not very frequently traded. The firm does not wish to be locked into using a platform and wants to be able to transfer assets in specie to another platform if necessary. Explain the main criteria you would use for selecting a platform for this particular IFA firm. (30) Total marks available for this section: 60 10

11 NOTE ON MODEL ANSWERS The model answers given are those which would achieve maximum marks. However, there are Alternative answers to some question parts which would also gain high marks. For the sake of clarity and brevity not these entire alternative answers are shown. An oblique (/) indicates an equally acceptable alternative answer. Model answer for Question 1 The revenue of wrap platform service operators is mainly derived from the fees and annual management charges paid by investors. To help offset some of the platform charges to clients and to remain competitive with the fund supermarkets, the wrap platform operator negotiates favourable terms for charges with as many fund managers as possible. The fund managers generally agree to rebate some of their annual charge back to the wrap platform, which then credits the rebate to the client account. The revenue of fund supermarkets is mainly derived from the fees paid by product providers from the initial and annual charges on funds and other products held on the platform. In most cases, fund management houses are also expected to make one-off or other payments for being available on the platform. Funds on the platform are therefore generally restricted to those that can pay these charges. Fund supermarkets do not always make a direct overt charge on the investor for the platform services and where they do, the charges tend to be fixed in monetary terms. Model answer for Question 2 The platform operator must have obtained the client s written agreement. The written agreement would contain the monetary amount or percentage of the adviser charge as well as how and when it can be taken. Any variation of these original terms must be subject to a new agreement between the parties. Model answer for Question 3 There are four main ways to finance the cash account. The first and most direct method is for the client to pay cash into the account direct from his or her own resources. This is the normal procedure when initially setting up the wrap account. The client could then top up the cash account directly in the same way from time to time as required. The other approaches are generally used once the client s account has been set up. The second method is to use dividends or interest from investments to make payments to the cash account. A third source of funds is the proceeds from the disposal of existing assets within the wrap, giving rise to residual cash. Dividends and capital disposals would be taxable. Currently, the fourth source of funds consists of cash rebates from providers. 11

12 Model answer for Question 4 (a) One way to transfer assets from one platform to another is for the ceding platform making the transfer to sell the assets and then transfer the cash proceeds to the other platform either directly or via the client. In the case of assets held in an ISA or a pension, the cash payment is made direct to the receiving platform s ISA or pension. The receiving platform may then buy assets of the same type for the client s account. A generally preferable alternative is to make a transfer of the assets in specie. The transfer of the asset is achieved by the receiving platform reregistering it. (b) Under the first method, the transfer constitutes a disposal for tax purposes by the client. Any gains on funds could be subject to capital gains tax and any profits on life policies could subject to Income Tax. With the second method, there are no tax consequences for the client on such transfers of funds or individual shares as there is no change of the underlying beneficial owner. This approach is only available for assets held in an ISA or pension or for funds not held in life assurance policies such as investment bonds. Model Answer for Question 5 Candidate would have gained full marks for any four of the following: Purchase the asset directly. Use an alternative fund supermarket or wrap platform. Refer the client to another adviser. Do nothing and decline the transaction. Review the client s fund preference and determine if another fund might suit the client. Model Answer for Question 6 Candidate would have gained full marks for any five of the following: Fees may be discounted. Consolidated tax statement and reporting. A range of funds are available and related discounts. There is a cash account/cash reserve. Ease of administration. On-line access to investments and client records. Model Answer for Question 7 Candidate would have gained full marks for any nine of the following: Workplace pension provision, capable of providing Nest and auto enrolment. Group SIPP/Group Personal Pension. Simplified payroll administration. Share ownership schemes. Implementation of salary sacrifice. Access to funded advice in a tax efficient manner. A potential enhancement to the overall remuneration package. Menu driven benefits. Portability. Potential discounts and/or institutional prices. The ability to consolidate benefits and ease administration. 12

13 Model Answer for Question 8 Customers who are holding investments on a platform are able to obtain a valuation of their portfolio at any time and at no extra cost, as often as they like. They are also able to obtain a breakdown of the asset allocation and individual product facilities (USA, Pension etc) at any time. These can be judged to be considerable improvements when compared to much less frequent paper-based valuations available through other types of investment services. Customers can obtain a range of information about their investments on the platform in order to make a more informed choice (can become much better informed) about their investments. The use of planning tools may also help them to understand how far their financial arrangements fall short of their needs and aims. Providing customers with greater access to information on their investments, as well as making customers better informed, can help to strengthen the relationship between the adviser and the customer. This creates not only improved customer relationship management (CRM) but also makes a customer more likely to remain loyal to a particular adviser and become a long-term client. Greater familiarity with investment and financial issues should help clients consider the possibility of investing in a wider range of asset classes. It might also help them understand such issues as investment risk and their own capacity and willingness to take on risk. This can help in the advice process, where a customer s awareness and understanding of different asset classes is assisted by the wrap platform. A platform may offer a customer access to asset classes and/or individual assets that would not be available to them on a direct, individual basis or would be available but at much higher transactional costs. Where advisers are involved, they should be able to communicate important information online to clients quickly and efficiently. This in turn could potentially enhance the overall service being delivered to customers. Some efficiencies may also be seen in the overall customer value chain that ultimately are of benefit to the client. The platform should help rebalance clients portfolios regularly and easily with relatively little cost. Some platforms will also be able to rebalance portfolios automatically on receipt of appropriate instructions or predetermined investment triggers. This facility therefore enhances the overall client service by avoiding time delays in order to take account of changing market conditions, particularly for frequently traded or volatile stocks. The platform can place both parties in the advice process, customer and adviser, on a more equal basis, as opposed to where the customer feels left out of the process and has to instigate contact with the adviser on a reactive basis in order to receive information or on-going advice and support. In this respect, a platform can be considered to be empowering a customer. The use of platforms may also reduce the costs of investing in funds and financial products generally. This is as a result of the platforms negotiating lower provider charges and the aggregation of the purchase, sale and other aspects of holding investments. Platforms can help to increase the transparency of charges. In essence, this means that customers can see the charges they are being asked to pay upfront. Platforms also become a mechanism for paying advisers for their services. Many customers are reluctant to pay explicit fees for advice direct to their adviser and a platform can help a customer to see the services that are being provided and therefore make them more comfortable to pay a fee and for that fee to be paid via the platform. Most platforms are portals for centralised information about a wide variety of investments that clients can access quickly and easily. This should increase the efficiency of the product research process and the assessment of suitability for clients, as well as the more rapid production of high quality suitability reports. Platforms should help clients provide better advisory and administrative services to clients. Reporting should be more accurate as well as more frequent, faster and easier to understand. 13

14 Platforms provide customers with greater access to information, allow the consolidation of existing assets, reduce the amount of paperwork and administration required, widen the range of investment options, often reduce the costs of accessing these investments and bring the customer closer to their adviser and a more interactive participant in the advice process. Model answer for Question 9 The charging structure of the platform should be appropriate to the size and trading frequency of the client portfolio and the complexity of the underlying investments for each client. This particular firm should consider platforms that charge lower for larger portfolios given its particular client base consisting of portfolios of 750,000. The balance between fixed fees and transaction charges /fees should be assessed, as well as any third party custodian fees that might be payable. Any other ad hoc charges that might arise should also be considered. From the evidence provided in the question, this firm would probably choose a platform where the annual charge is comparatively low, even if the transaction charges are relatively higher than average. Some platforms offer a wide range of pension and other wrappers; while some are more restricted. If the firm makes extensive use of a particular wrapper (e.g. SIPP, offshore bond), the cost of that particular product would be important in the selection of a platform. The general scope of clients that the platform is able to serve is also a fundamental consideration. For example, platforms may have UK residency restrictions. It is unclear how the profile of clients is made up in terms of residency for this particular IFA, but it may be that if they deal with a large number of non-resident people then the residency restrictions become an important factor in selecting a platform and the extent to which they could be utilised for all clients. The range of assets, share types, currency classes, and stock exchanges available on the platform should match the range that the firm wishes to advise on. An independent advisory firm will need to have access to a wide variety of investments post-rdr. An additional factor here might be the flexibility of the platform in re-registering assets. This flexibility could be useful if there are regulatory changes or other unplanned changes that necessitate re-registering. Exit penalties for leaving the platform are also a factor for large portfolios. Platforms offer a range of extra facilities. Most offer some portfolio planning tools, e.g. risk profilers, which may (or may not) be included in the charges. The firm should consider their quality and decide whether they are required as part of the platform or whether they could be accessed elsewhere when needed. Some platforms offer an asset-rebalancing tool to reset clients asset allocation automatically at regular intervals. But the firm should take care to understand the methodology and algorithms used by the rebalancing tool. The firm may want to consider how to brand or co-brand the platform, including the adviser s website and any other portals. The quality of a platform s service is very important for an advisory firm. It may be worth asking other platform users about their experience and drawing on industry-wide surveys. The quality of training is a key factor and so is the availability of support, e.g. from dedicated client relationship managers and trading desks. Key functionality factors include: ease of using the system, design of the website, reliability of systems, speed of transacting new business and switches, staff attitudes and competence. Access to and integration with third party administration systems, back office systems and software is another important consideration. Some platforms may be easier to integrate with the firm s existing IT infrastructure. 14

15 Further considerations would be the integrity of the data on the platform and the compliance controls and complaints procedures offered by the platform provider. For example, one would consider how far the services offered would help the firm meet Treating Customers Fairly requirements. The platform should be capable of surviving for the long term. Financial strength by itself is not enough. Some financially very strong institutions have entered and subsequently left the platform market. The platform should also have business continuity arrangements to underpin its service and operations. Reputation and a long track record of offering platform services are also key, as is a credible business model and strategy. 15