CISI PCIAM cheat sheet

Suitability rests on three pillars: the client's knowledge and experience, financial situation and objectives, and risk tolerance; all three must be documented before a recommendation is made.

Capacity for loss is distinct from risk tolerance: tolerance is attitudinal, capacity is the financial ability to absorb a fall in value without derailing the client's goals.

Time horizon drives asset allocation more than age alone; short horizons (under 5 years) generally exclude equities for capital-protection objectives.

Concentration risk: a single holding above roughly 10-15% of a portfolio warrants explicit justification and a written plan to reduce it where tax allows.

Modern portfolio theory: diversification reduces unsystematic risk; systematic (market) risk cannot be diversified away and is compensated by the equity risk premium.

Correlation below +1 between assets lowers portfolio volatility for the same weighted return; the lower the correlation, the greater the diversification benefit.

Rebalancing to a target weight band (e.g. plus or minus 5%) enforces sell-high/buy-low discipline and keeps the risk profile aligned with the mandate.

Vulnerable clients: signs include bereavement, cognitive decline, coercion by a third party, and unusual urgency; enhanced record-keeping and a trusted-contact check apply.

Total expense ratio plus transaction costs plus any performance fee gives the true cost drag; a 1% annual drag can remove roughly a fifth of a 5% gross return over 20 years.

Advice vs guidance: advice involves a personal recommendation to a specific client; guidance gives information without recommending a specific action.

Risk-reward: expected return must compensate for risk taken; Sharpe ratio = (portfolio return minus risk-free rate) divided by standard deviation of returns.

Yield measures: running yield = annual coupon divided by current price; gross redemption yield accounts for the pull to par at maturity.

Bond price sensitivity: duration approximates the percentage price change for a 1% change in yield; modified duration = Macaulay duration divided by (1 + yield).

Equity valuation: price/earnings = price per share divided by earnings per share; a lower P/E may signal value or a lower expected growth rate.

Dividend cover = earnings per share divided by dividend per share; a cover below 1.5 signals a dividend at risk of being cut.

Active vs passive: active management must beat the benchmark after fees to add value; persistent outperformance is rare, so cost matters.

Dollar-cost averaging spreads entry price risk but does not protect against a falling market; lump-sum investing has higher expected return over long horizons.

Suitability of a product is judged against the stated objective, not its popularity; complex products require an assessment of the client's ability to understand the risks.

Strategic asset allocation sets long-term weights; tactical asset allocation makes short-term deviations within agreed limits set out in the mandate.

Rebalancing bands, benchmark tracking error limits, and permitted asset classes must be defined in the investment policy statement before management begins.

Performance attribution splits return into allocation effect (asset-class weights) and selection effect (security choice within classes).

Money-weighted return (IRR) reflects the client's actual cash-flow experience; time-weighted return strips out cash-flow timing and measures manager skill.

Benchmark choice must match the mandate: a UK equity mandate is measured against a UK equity index, not a global index, or the comparison is meaningless.

Liquidity management: hold sufficient cash or near-cash to meet known withdrawals without forced selling of illiquid or volatile assets at the wrong time.

Currency risk: unhedged overseas holdings add volatility from exchange-rate moves; hedging reduces this but introduces hedging cost and basis risk.

Tax-aware management: use annual allowances, place income-producing assets in tax-sheltered wrappers where appropriate, and harvest losses to offset gains.

Record-keeping: every trade, rationale, and client instruction should be evidenced so the suitability of the portfolio can be reconstructed later.

Regulatory principles: act with integrity, due skill and care, communicate clearly, manage conflicts of interest, and treat customers fairly.

Know your customer: collect identity, financial circumstances, objectives, risk tolerance, and capacity for loss, and keep the record current.

Risk profiling tools are aids, not substitutes for judgement; an inconsistent questionnaire result must be probed and reconciled in writing.

Pension annual allowance is tapered for high earners; the money purchase annual allowance restricts contributions once flexible pension income has been accessed.

Inheritance tax: nil-rate band plus residence nil-rate band where the main home passes to direct descendants; lifetime gifts may be exempt or become chargeable if the donor dies within seven years.

Capital gains tax applies to disposals above the annual exempt amount; losses must usually be claimed within set time limits to be usable.

Individual savings accounts shelter income and gains from tax; the annual subscription limit applies across all ISA types combined.

Consumer Duty requires firms to deliver good outcomes across products, price and value, consumer understanding, and consumer support.

Complaint handling: acknowledge promptly and resolve within the regulatory time limit, with referral to the Financial Ombudsman Service if unresolved.

Risk tolerance is attitudinal and stable; risk capacity is financial and can change with income, liabilities, and time horizon.

A client's required return is derived from goals, not from appetite: needed return = (target future value divided by current capital)^(1/n) minus 1.

Concentration in employer stock combines investment risk with human-capital risk; both fall together in a downturn.

Asset allocation explains most of the variability of portfolio returns over time; security selection explains less.

Diversification benefit is greatest when correlations are low or negative; correlations tend to rise in market stress.

Rebalancing restores target weights and controls drift in the risk profile; it is a risk-control tool, not a return forecast.

A written investment policy statement records objectives, constraints, permitted assets, and review frequency.

Vulnerability indicators include sudden changes to beneficiaries, unusual urgency, and third-party pressure; escalate and document.

Cost drag compounds: fees and transaction costs reduce net return every year and should be disclosed in cash terms where possible.

Personal recommendation means advice to a specific client on a specific transaction; generic information is not advice.

Sharpe ratio = (return minus risk-free rate) divided by standard deviation; higher is better for the same asset class.

Modified duration estimates percentage price change for a 1% yield change; longer duration means greater interest-rate sensitivity.

Dividend cover = earnings per share divided by dividend per share; low cover signals dividend risk.

P/E ratio = price per share divided by earnings per share; compare within sector and against growth expectations.

Active management must beat the benchmark net of fees to add value; gross outperformance can vanish after costs.

Dollar-cost averaging spreads entry timing risk but does not remove market risk.

Product suitability is judged against the client's objective and ability to bear loss, not against popularity.

Complex products require assessment of the client's understanding of the risks involved.

Strategic asset allocation sets long-term weights; tactical allocation makes short-term deviations within mandate limits.

The investment policy statement defines permitted assets, benchmark, rebalancing bands, and review frequency before management starts.

Performance attribution separates allocation effect from selection effect.

Time-weighted return measures manager skill by removing cash-flow timing; money-weighted return reflects the client's experience.

Benchmark selection must match the mandate; a mismatched index makes performance comparison meaningless.

Hold sufficient liquidity to meet known withdrawals without forced selling of volatile assets.

Unhedged overseas holdings add currency volatility; hedging reduces it but adds cost and basis risk.

Use annual tax allowances and harvest losses where permitted to improve after-tax outcomes.

Keep records of trades, rationale, and client instructions so suitability can be reconstructed.

Regulatory principles include integrity, due skill and care, clear communication, managing conflicts, and treating customers fairly.

Know your customer requires identity, circumstances, objectives, risk tolerance, and capacity for loss, kept current.

Risk profiling tools assist but do not replace adviser judgement; inconsistencies must be reconciled in writing.

The pension annual allowance is tapered for high earners; the money purchase annual allowance applies after flexible access.

Inheritance tax uses the nil-rate band and residence nil-rate band; lifetime gifts may be exempt or chargeable if death occurs within seven years.

Capital gains tax applies above the annual exempt amount; losses must be claimed within set time limits.

ISAs shelter income and gains; the annual subscription limit applies across all ISA types combined.

Consumer Duty requires good outcomes in products, price and value, understanding, and support.

Complaints must be acknowledged promptly and resolved within the regulatory time limit, with Ombudsman referral if unresolved.

Suitability requires documented knowledge, financial situation, objectives, and risk tolerance before any recommendation.

Capacity for loss is financial; risk tolerance is attitudinal; both must be assessed separately.

Time horizon shapes allocation: short horizons generally exclude equities for capital-protection goals.

Single holdings above roughly 10-15% of a portfolio warrant written justification and a reduction plan.

Diversification reduces unsystematic risk; systematic risk remains and is compensated by the equity risk premium.

Lower correlation between assets lowers portfolio volatility for the same weighted return.

Rebalancing within target bands restores risk alignment and enforces disciplined trading.

Vulnerability signs include bereavement, cognitive decline, coercion, and unusual urgency; escalate and document.

Total cost drag compounds annually and should be disclosed in cash terms where possible.

Advice is a personal recommendation; guidance provides information without recommending a specific action.

Sharpe ratio = (return minus risk-free rate) divided by standard deviation; higher is better within an asset class.

Running yield = annual coupon divided by current price; gross redemption yield accounts for pull to par.

Modified duration approximates percentage price change for a 1% yield change; longer duration means more sensitivity.

P/E = price per share divided by earnings per share; compare within sector and against growth expectations.

Dividend cover = earnings per share divided by dividend per share; cover below about 1.5 signals dividend risk.

Active management must beat the benchmark after fees to add value.

Dollar-cost averaging spreads entry timing risk but does not remove market risk.

Suitability is judged against the client's objective and ability to bear loss, not popularity.

Strategic allocation sets long-term weights; tactical allocation makes short-term deviations within mandate limits.

The investment policy statement defines permitted assets, benchmark, rebalancing bands, and review frequency.

Performance attribution separates allocation effect from selection effect.

Time-weighted return removes cash-flow timing to measure manager skill; money-weighted return reflects client experience.

Benchmarks must match the mandate; a mismatched index makes comparison meaningless.

Liquidity must cover known withdrawals without forced selling of volatile or illiquid assets.

Unhedged overseas holdings add currency volatility; hedging reduces it but adds cost and basis risk.

Tax-aware management uses annual allowances and loss harvesting where permitted.

Records of trades, rationale, and instructions allow suitability to be reconstructed.

Regulatory principles include integrity, due skill and care, clear communication, managing conflicts, and treating customers fairly.

Know your customer requires identity, circumstances, objectives, risk tolerance, and capacity for loss, kept current.

Risk profiling tools assist but do not replace adviser judgement; inconsistencies must be reconciled in writing.

The pension annual allowance is tapered for high earners; the money purchase annual allowance applies after flexible access.

Inheritance tax uses the nil-rate band and residence nil-rate band; lifetime gifts may be exempt or chargeable if death occurs within seven years.

Capital gains tax applies above the annual exempt amount; losses must be claimed within set time limits.

ISAs shelter income and gains; the annual subscription limit applies across all ISA types combined.

Consumer Duty requires good outcomes in products, price and value, understanding, and support.

Complaints must be acknowledged promptly and resolved within the regulatory time limit, with Ombudsman referral if unresolved.