Wealth management and financial planning
Domain 1: Wealth management and financial planning
This domain tests holistic advice rather than product selection: how a client's goals, balance sheet and behaviour become a funded, reviewable plan, and how suitability is evidenced. Questions target the planning process, goal quantification, attitude to risk versus capacity for loss, cash-flow modelling, protection and pension integration, and the behavioural biases that derail plans.
The process, and two different risk questions
- Define scope, objectives and constraints: time horizon, liquidity needs, tax status, ethical preferences, dependants.
- Gather quantitative data (assets, liabilities, income, expenditure, wrappers, pension and State Pension forecasts) and qualitative data (health, family, values).
- Model and stress-test against inflation and a poor early-returns sequence, then recommend, implement and review on both a calendar and an event-driven basis (bereavement, business sale, inheritance).
- Attitude to risk is what the client wants; capacity for loss is what the client can afford. Where they conflict, capacity constrains the recommendation, and the file must say so.
Worked example: sequencing risk in drawdown
A 58-year-old holds £800,000 in drawdown and wants £32,000 a year from age 60 - a 4% withdrawal. A 15% fall in year one leaves £680,000; taking £32,000 is now a 4.7% withdrawal, and because the loss is crystallised early the portfolio cannot recover on the same terms. Reasoning: hold two years' spending (about £64,000) in cash or short gilts so spending is not funded by forced selling at depressed prices, keep the remaining £736,000 at the agreed strategic allocation and rebalance, and model the £32,000 net of income tax - gross drawdown is not net income unless the tax-free lump sum or a nil marginal rate applies.
Marks-losing traps
- Treating a completed risk questionnaire as the suitability answer.
- Ignoring inflation, tax on withdrawals and the State Pension forecast.
- Assuming a 4% withdrawal rate is safe at every horizon and in every market.
- Leaving protection until last where a dependant's income depends on the client.
- Choosing a product before stating the objective it satisfies.