Investment Advice
This domain tests the advice process end to end: gathering client information, categorising the client, assessing suitability and documenting the recommendation. Questions frequently turn on the difference between suitability and appropriateness, and between risk appetite and capacity for loss.
Suitability
- Under COBS 9 the firm must obtain information on the client's financial situation, investment objectives, knowledge and experience, risk tolerance and capacity for loss, then match a suitable product.
- A suitability report must explain the recommendation, the risks and the costs. Firms must disclose ex-ante costs and later ex-post costs, and agree a review frequency.
- Capacity for loss (ability to absorb falls without damaging lifestyle) is distinct from attitude to risk, and the lower of the two constrains the recommendation.
Client categorisation
- Clients are retail, professional (per se or elective) or eligible counterparties.
- Elective professional status requires two of three criteria: ten relevant trades per quarter over four quarters; a portfolio exceeding €500,000; at least one year in a professional position. The client must be warned in writing about lost protections and must elect the status.
Appropriateness
- COBS 10 applies to non-advised sales of complex products: the firm assesses knowledge and experience and warns if the product is not appropriate. This is a lighter test than suitability and does not consider objectives or financial situation.
Independence
- Firms must state whether advice is independent or restricted, and explain the basis of any restriction.
Worked example
A client has a €600,000 portfolio and has averaged 12 trades per quarter over the past year, but has only six months' professional experience. She meets two of the three criteria (portfolio size, trading frequency), so the firm may treat her as an elective professional provided the written warning is given and she elects the status in writing.
Traps that cost marks
- Treating a high risk appetite as sufficient when capacity for loss is low.
- Confusing appropriateness (non-advised, knowledge and experience) with suitability (advised, full client picture).
- Opting a client up without the written warning and election.
- Presenting restricted advice as independent because products are whole-of-market.
Dealing and Client Servicing
This domain tests the execution and after-sales side of the relationship: how orders are placed and executed, how trades are aggregated and allocated, how client assets are protected, and how servicing obligations such as reporting and complaints are met.
Order types and execution
- Market orders execute immediately at the best available price; limit orders set a maximum purchase or minimum sale price and may never fill; stop orders become market orders once a trigger is hit; stop-limit orders convert to limit orders at the trigger.
- Best execution considers price, cost, speed, likelihood of execution and settlement, size and nature of the order. It is not simply the best price, and the firm must publish and follow an execution policy.
Dealing mechanics
- Client orders must be executed promptly and fairly, with a documented aggregation and allocation policy that does not disadvantage any client. Front-running is prohibited.
- Trades are confirmed, then settled in CREST on T+2. Failed trades carry buy-in risk.
Client assets and servicing
- CASS requires client money to be segregated, reconciled daily and, where relevant, returned within ten business days. Custody assets are reconciled and clients receive statements.
- Firms must handle complaints within eight weeks and keep records of complaints and their outcomes.
Worked example
A client buys 2,000 UK shares at £5.00. Consideration = £10,000. SDRT at 0.5% = £50. Commission at 0.30% = £30. PTM levy (trades of £10,000 or more) = £1. Total cost = £10,081. On a sale there is no SDRT, and the levy still applies at the threshold, so proceeds are higher than a symmetrical calculation would suggest.
Traps that cost marks
- Applying SDRT to sales; it is a purchase tax. AIM shares are generally exempt from stamp duty and SDRT.
- Assuming a stop order guarantees a price; it becomes a market order and can slip.
- Treating best execution as price-only, ignoring cost, speed and settlement likelihood.
- Aggregating orders without a fair allocation method, which can disadvantage one client.
- Forgetting that the PTM levy has a consideration threshold.