Client Advice, Suitability and Wealth Planning
This domain tests the advice process end to end: gather, assess, recommend, document, review - plus the tax wrappers that make a sound recommendation efficient.
Core rules
- Suitability (COBS 9) requires knowledge of the client's objectives, financial situation, knowledge and experience, risk tolerance and capacity for loss. Capacity for loss is objective; risk tolerance is emotional. Both must be recorded and reconciled.
- KYC and AML under the Money Laundering Regulations: verify identity and source of funds, monitor the relationship, and report suspicions. Records must outlive the relationship.
- Wrappers. The ISA annual allowance is £20,000 per individual, with growth and income free of UK income tax and CGT. Registered pensions attract tax relief on contributions, subject to an annual allowance of £60,000 (tapered for high earners). Outside wrappers, the CGT annual exempt amount is £3,000 and the dividend allowance £500 for the current UK tax year.
- Reviews keep advice alive: changed circumstances, drift from target weights and product changes all trigger a documented review.
Worked example
A higher-rate taxpayer sells shares with a gain of £23,000 and makes no other disposals in the year. What is the CGT bill? Reasoning: deduct the annual exempt amount - £23,000 − £3,000 = £20,000 taxable. Higher-rate CGT on shares is 20%, so £4,000. The advice point is that the same gain inside an ISA would have fallen outside CGT entirely: wrapper utilisation, not stock selection, produced the saving.
Traps that cost marks
- Equating a high risk tolerance with a high capacity for loss. They are different tests and both are required.
- Assuming ISA allowances are transferable between spouses. They are not; each individual has their own.
- Overlooking the pension annual allowance taper for high earners.
- Quoting tax figures without checking the current tax year - allowances change.