2.2 - Meeting Clients Needs

Meeting Clients' Needs

Insurance

Insurance is a crucial aspect of meeting clients' needs, serving as a form of protection. The focus is on whether insurance policies pay out an income or a lump sum upon a claim, rather than the specifics of what each policy covers.

  • Accident, Sickness, and Unemployment Insurance: Pays out a regular income.

  • Home and Contents Insurance: Pays out a lump sum.

  • Income Protection: Pays out an income (as the name suggests).

  • Critical Illness Cover: Pays out a lump sum.

  • Medical Insurance: Pays out a lump sum, covering the cost of operations.

  • Life Insurance: Can pay out either an income or a lump sum, depending on the policy. Income benefits may be provided if the main breadwinner dies, while lump sums are typical for whole-of-life or term assurance policies.

  • Endowment: Pays out a lump sum. It is a savings scheme with a life insurance component, paying out as life insurance if the insured dies during the term or as an investment at the end of the term.

It's more important to understand whether a policy pays an income or a lump sum rather than memorizing the specific coverage details.

Investment Products

An investor can make direct investments in shares and bonds, which are specified investments.

  • National Savings Investments and Products: Not specified investments.

  • Indirect Investments:

    • Collective Investment Schemes: Unit trusts, open-ended investment companies (OEICs), investment trust companies, or life company bonds.

    • Derivatives: Options, futures, forwards, contracts for difference (CFDs). These are geared and therefore riskier.

    • Specialist Investments: Direct investments in buildings, fine wine, works of art, antiques, etc., typically for wealthier investors.

Estate and Tax Planning

Estate planning involves deciding how an estate will be distributed upon death.

  • Tax Planning Advice: Advisors help reduce potential taxes legitimately through tax avoidance, but the tax benefits should not be the primary driver of investment decisions.

  • Venture Capital Trusts (VCTs): Offer significant tax breaks (e.g., 30% income tax relief on up to £200,000 invested). However, the focus should be on the underlying investment, not just the tax benefits.

Types of Tax:

  • Income Tax: Different rates based on basic, higher, or additional higher tax brackets.

  • Capital Gains Tax.

  • Inheritance Tax.

State Benefits

Numerous state benefits are available under certain circumstances.

Credit

Various forms of credit are available:

  • Loans (secured and unsecured).

  • Consolidated Loans.

  • Mortgages (secured).

  • Personal Loans (usually unsecured).

  • Student Loans.

  • Overdrafts.

  • Credit Cards.

  • Store Cards.

Retirement and Pensions

A key area involves understanding how pensions work and the choices available at retirement.

  • State Pension: Everyone is entitled to it if they meet certain national insurance payment requirements (approximately £155 a week currently).

  • Occupational Pension Scheme: Typically involves contributions from both employees and employers. These can be:

    • Defined Benefit (Final Salary) Schemes: Promise a certain percentage of final salary for each year worked (e.g., 1/60th of final salary per year). Increasingly rare in the private sector.

    • Defined Contribution (Money Purchase) Schemes: A percentage of salary is invested, typically in the stock market, until retirement.

  • Personal Pension/Stakeholder Pension: Variations of money purchase schemes.

  • Open Market Option: At retirement, individuals can shop around for the best annuity or drawdown options, regardless of where their pension was initially saved.

Retirement Choices:

  • Annuity: Purchasing a guaranteed income stream.

  • Drawdown: Living off the income from the still-invested pension fund.

  • Take Cash: Either as a lump sum (tax-inefficient) or smaller, phased withdrawals.

Market Characteristics and Pricing of Products

Multiple layers of entities are often involved in a product, each adding charges.

  • Initial Charge and Annual Management Charge: Common in collective investment schemes (e.g., 5% initial charge, 1.5% annual management charge).

  • Rebates and Discounts: Platforms may negotiate discounted rates and offer loyalty bonuses.

  • Additional Distribution Fees: Platform charges in addition to fund fees.

Distribution Channels

Covered in detail in COBS:

  • Independent Financial Advisor (IFA): Offers products from the whole market based on commission.

  • Multi-tied Advisor: Offers a limited range of products.

  • Single-tied Advisor: Only offers products from one provider.

Value Chain

Each entity in the value chain adds costs:

  • Fund Manager: Manages the investment.

  • Product Provider: Packages the product (e.g., platform).

  • Advisor: Uses the platform to advise the client.

Platforms like CoFunds are designed for advisors, not retail investors. The costs from the advisor, platform, and collective are all added to the investor's expenses.