Private Client Investment Advice & Management
What the exam tests
This domain tests the end-to-end private-client advice process: discovery, risk and capacity for loss, suitability, the investment policy statement (IPS), advisory and discretionary mandates, and reviews. Marks come from showing a documented chain from client facts to recommendation.
Core rules and concepts
- Know your client: collect objectives, time horizon, income and capital needs, tax position, liquidity, existing holdings, knowledge and experience, attitude to risk and capacity for loss. COBS 9 requires sufficient information; a questionnaire score alone is not enough.
- Risk tolerance versus capacity for loss: tolerance is willingness to accept volatility; capacity is financial ability to absorb losses without derailing goals.
- Suitability: the recommendation must meet the client's objectives and be suitably diversified. The suitability report should explain why the recommendation is suitable, including costs and disadvantages.
- Consumer Duty: firms must act to deliver good outcomes, avoid foreseeable harm and support informed decisions; vulnerability and communication needs matter.
- IPS: records objectives, constraints, risk, asset allocation, benchmark, rebalancing policy, reporting and review triggers.
- Mandates: advisory requires client consent; discretionary requires a signed agreement; execution-only is non-advised.
Worked example
A 62-year-old has £800,000, needs £30,000 a year from age 65, has no earned income and only £50,000 cash. Her risk tolerance is medium, but a 90/10 equity portfolio would not fit her capacity: a 35% fall would reduce the portfolio to £520,000, and inflation-linked withdrawals could exhaust capital. The adviser recommends a diversified 50/50 strategy, holds three years' spending in cash and short gilts, stress-tests a 25% fall, and documents that capacity is limited. The risk score is one input, not the answer.
Traps that cost marks
Treating a risk score as the advice; ignoring capacity for loss; recommending concentrated or illiquid holdings without justification; failing to explain a switch; overlooking charges and tax; reviewing only when markets fall; using jargon the client cannot understand.