Financial Planning and Advice
This domain tests the advice process end to end: gathering client information, assessing risk properly, selecting suitable wrappers and products, and documenting why the recommendation fits the client's objectives. Suitability questions dominate.
The advice process
Know your client through a fact find covering circumstances, objectives, time horizon, existing arrangements and dependants. Assess both attitude to risk (a psychological tolerance) and capacity for loss (the financial ability to absorb a fall). Then allocate assets, select products, produce a suitability report and agree a review cycle. COBS 9 requires a suitability assessment; COBS 4 requires financial promotions to be fair, clear and not misleading.
Risk and diversification
Diversification reduces unsystematic risk across asset classes, sectors and geographies, but cannot remove market risk. A short time horizon or a fixed cash need argues for cash or short-dated bonds regardless of a client's appetite for risk.
Wrappers and allowances
ISAs shelter £20,000 per adult per tax year; Junior ISAs £9,000. Registered pensions give tax relief at the marginal rate, with an annual allowance of £60,000 (carry-forward available) and a 25% tax-free lump sum subject to a cap. CGT has a small annual exempt amount; IHT has a nil rate band plus residence nil rate band. Allowance figures change, so learn the structure as well as the current numbers.
Accumulation and decumulation
At retirement the main routes are annuity purchase, flexi-access drawdown and UFPLS. In drawdown, sequence-of-returns risk matters: falls early in retirement permanently damage the pot.
Worked example
A 58-year-old wants £30,000 in two years for a house deposit and also wants long-term growth. Investing the whole sum in an equity fund would be unsuitable because a 20% fall would leave the objective unachievable and there is no time to recover. The correct approach is to hold the £30,000 in cash or short-dated gilts to match the liability, and invest only the surplus against the long-term profile - and to set cash aside before any question of risk tolerance arises.
Traps that cost marks
Treating a risk questionnaire score as capacity for loss. Recommending from past performance. Ignoring the tax wrapper. Giving a recommendation without a documented suitability rationale.