Chapter 10 · Financial Advice

1. Budgeting — day-to-day cashflow visibility
2. Borrowing — good vs bad debt (Ch 9)
3. Protection — life, critical illness, income protection, household
4. Investment / saving — matching time horizon to instrument
5. Later-life planning — annuity / drawdown, care funding, powers of attorney
6. Estate planning — wills, trusts, gifts, IHT reliefs
7. Tax planning — legitimate use of reliefs + allowances + wrappers (ISA, SIPP)

Sometimes an 8th layer: offshore considerations for expats / cross-border families.

Savings: short-term (< 3 years), low-risk cash-equivalents. Emergency fund + short-term goals.

Investments: longer-term (5+ years), higher-risk / higher-expected-return. Equities, bonds, funds.

Standard rule: build a 3–6 month emergency fund in savings BEFORE investing.

• Tax compliance — file correctly
• Tax planning — legitimate use of reliefs / allowances / wrappers within the rules
• Tax avoidance — legal but often against the spirit of the law (increasingly disputed under HMRC's GAAR)
• Tax evasion — ILLEGAL

Modern advice firms steer clear of aggressive avoidance due to reputation + regulatory + tax-authority risk.

Legitimate use cases: expats, multi-jurisdiction families, currency diversification, asset protection.

Modern reality: CRS (Common Reporting Standard) and FATCA mean tax authorities automatically receive information from offshore institutions. "Hidden" offshore is largely impossible. Disclose, report, comply.

Dying WITHOUT a valid will = dying INTESTATE. The estate is distributed by STATUTORY RULES of intestacy, which often produce outcomes the deceased would not have chosen (e.g. unmarried partner receives nothing under many jurisdictions).

A personal representative (PR) administers the estate — either an EXECUTOR (named in the will) or an ADMINISTRATOR (court-appointed when there's no will or no named executor).

ATTORNEY (LPA — Lasting Power of Attorney): appointed IN ADVANCE by the individual while they still have mental capacity. Fast, cheap, flexible.

DEPUTY: appointed BY A COURT (UK: Court of Protection) AFTER capacity is lost, when no LPA is in place. Much slower, more expensive.

A legal arrangement where a SETTLOR transfers assets to TRUSTEES who hold and manage them for the benefit of BENEFICIARIES. Legal ownership (trustees) separated from beneficial ownership (beneficiaries).

Common uses: estate planning, asset protection, controlling distribution to minors / vulnerable beneficiaries, charitable giving.

Joint tenancy: co-owners hold an equal undivided interest. On death of one, that share automatically passes to the survivor (right of survivorship — the asset passes OUTSIDE the will).

Tenancy in common: each owner has a defined share which passes by will / intestacy on death.

Spouses often hold the family home as joint tenants. Other co-owners (business partners, unmarried couples with tax planning needs) often use tenancy in common.

Legal process for individuals unable to meet their debts. Assets typically vested in a trustee in bankruptcy for the benefit of creditors. UK: discharge typically after ~12 months. Significant restrictions (e.g. cannot act as company director).

Alternatives to full bankruptcy: Individual Voluntary Arrangement (IVA), Debt Relief Order (DRO) for low-asset cases.

• UNSOLICITED contact
• PRESSURE to act quickly
• Promises of UNREALISTIC returns
• Requests for unusual payment methods (gift cards, crypto, wire transfer to a new bank)
• Firm credentials that don't verify against the regulator

UK FCA ScamSmart, US SEC EDGAR verify firm legitimacy. Slow down, verify, never feel rushed.

1. GATHER — fact-find: circumstances, objectives, attitude to risk, capacity for loss, knowledge / experience
2. ANALYSE the situation
3. IDENTIFY suitable solutions
4. PRESENT and explain the recommendation
5. IMPLEMENT the recommendation
6. MONITOR + REVIEW periodically

Each step has regulatory documentation requirements. Reviews typically annual.

MiFID II Art. 25 / FCA COBS 9. The adviser must consider:

• Client's objectives
• Financial situation
• Time horizon
• Attitude to risk
• Capacity for loss
• Knowledge and experience

Failure to evidence suitability is a leading cause of regulatory enforcement + consumer redress.

Right to CANCEL a contract within a specified period after entering, typically without penalty. UK: 14 days for most life insurance / pensions / investments (30 days for life insurance).

Protection against pressured or impulsive purchases.

UK complaints ladder:

1. Complain to the firm — firm has time-bound obligations to respond
2. Escalate unresolved complaints to FOS (Financial Ombudsman Service) — free, binding on firm (current compensation cap £415k)
3. If the firm has failed → FSCS (Financial Services Compensation Scheme) — different limits per product type

Risk tolerance: the client's EMOTIONAL / PSYCHOLOGICAL willingness to take risk. "How would you feel if your portfolio fell 20%?"

Capacity for loss: the client's FINANCIAL ABILITY to absorb a loss without it materially affecting their goals / standard of living.

A client may be WILLING to take risk (tolerance) but UNABLE to afford the consequences (capacity). Suitability must consider both — usually use the LOWER of the two to set the risk level.

Even a "suitable" product must be affordable. Can the client SUSTAIN recommended contributions / premiums / repayments over the relevant time horizon? Particularly tested for regular-contribution products (pensions, monthly savings, insurance).

FCA vulnerability drivers: health · life events · capability · resilience. ~50% of UK adults show characteristics at some point. Consumer Duty (2023) requires firms to monitor outcomes for vulnerable customers and prevent foreseeable harm.

If the client REFUSES to share enough for a proper suitability assessment, the adviser should:

• Not provide a suitability-based recommendation
• Offer EXECUTION-ONLY service (client directs the trade with no recommendation), or
• DECLINE the engagement

Document the limitation + client's decision. Proceeding "as if" suitability was assessed = mis-selling.

Independent: assesses the WHOLE relevant market; no restrictions on products recommended.

Restricted: recommends from a LIMITED range (single provider, or subset of product types). Both legitimate — but the client must be told BEFORE engagement which type of advice they're getting.

Since the UK Retail Distribution Review (2013), financial advisers can NO LONGER be paid by commission from product providers on new investment / pension business. Adviser fees must be EXPLICITLY agreed with the client.

Aim: remove provider-funded incentive to recommend higher-commission products. Similar reforms globally: Australia FOFA, India, Netherlands.

Standard sequence (cross-ref Ch 8):

1. IDENTIFY
2. MANAGE via processes (information barriers, segregation)
3. DISCLOSE to the client BEFORE acting
4. DECLINE where the conflict cannot be adequately managed

Gifts and inducements are a common conflict area. Firms have gift policies with low de minimis thresholds. MiFID II largely banned third-party inducements for independent advice.