How to succeed with the AFA examination · 2020-03-11 · AFA electronic exam demo On the LIBF login AFA page you will find a link to an electronic exam demo which is very useful

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How to succeed with the AFA examination

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CONTENTS

Section One: Background to the qualification .............................. 3

Section Two: Examination format ................................................... 4

Section Three: Study materials ....................................................... 7

Section Four: How to use the time available ................................. 9

Section Five: Structure of the report ............................................ 13

Section Six: Examiner’s report ..................................................... 15

Section Seven: Examples of additional information ................... 20

Section Eight: Example of preparation ........................................ 22

Section Nine: Planning your time ................................................. 34

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Section One: Background to the qualification

The Diploma for Financial Advisers (DipFA) is a QCF level 4 qualification and comprises two mandatory units: Unit 1: Financial Services Regulations and Ethics (FSRE), assessed by an online multiple choice examination (100 questions, pass mark 70%) Unit 2: Advanced Financial Advice (AFA) which is assessed by:

• Coursework; and a

• Written/typed examination The coursework is submitted after approximately 16 weeks of study and consists of a written assignment and short answer questions. The AFA examination requires a candidate to write a report based on a client fact find which will be released six weeks before the examination date. The pass mark for both the coursework and the examination is 50%. The coursework assignment contributes 30% and the examination contributes 70% to the overall assessment. If you receive at least 50% of the marks in the coursework and 50% or more of the marks in the examination, the weightings do not really matter – you’ve passed AFA. However, if you were to receive between 45% - 49% it may still be possible to pass AFA without a re-take if you score sufficient marks in the other element to achieve an overall mark of 50%. For example, if you receive 45% in the coursework, then a mark of 53% in the examination would mean that you have been successful overall. (45 x 30% = 13.5; 53 x 70% = 37.1. 13.5 + 37.1 = 50.6) If you receive 63% in the coursework, then a mark of 45% or more in the examination would mean that you have been successful overall. (63 x 30% = 18.9; 45 x 70% = 31.5. 18.9 + 31.5 = 50.4) This guide is to help you prepare for the examination element of AFA.

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Section Two: Examination format

2.1 Outline of the task

This is a three hour written or typed (depending on your registration) examination based on the fact find issued six weeks in advance of the exam date.

Note: it is worth checking your registration at an early stage to ensure that you have been allocated a test centre that is convenient and that your preference for a written or typed examination has been met.

Taking the examination on a typed basis does not give an advantage of spell check/grammar check so the choice comes down to the method you feel most comfortable with.

On the day of the exam you will be required to produce a suitability report for your client/s based on the fact find issued, together with some additional information that you will see for the first time.

In the examination, you will receive the following:

• A copy of the fact find, which will be identical to the one that you have been sent in advance

• Some additional pieces of information (either on screen or in the examination booklet depending on your method of sitting the exam)

• A copy of the LIBF tax tables

The additional information is likely to change the report a little but with the right preparation this should not cause too many problems.

As a result of the additional information, you need to be aware that the areas covered by the initial fact find are not the limit of the knowledge that you will need on the day of the exam. This is discussed in Section Four.

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2.2 Preparing for the exam

The great thing with this part of the qualification is that you can do a lot of preparation in advance of the exam. Students who are successful are those who devote time to writing and practising the report in advance.

The fact find will detail the clients’ circumstances as well as ‘other issues/priorities’ which are the areas they want to discuss or receive advice on. You will be addressing the report to the client(s) and are required to identify their needs.

Sometimes, this will be a question of explaining something to a client, possibly highlighting the advantages and drawbacks of a certain approach or course of action.

However, where possible, make fully justified recommendations. Whatever you recommend, outline all the features and considerations, and explain why it is appropriate for this particular client situation. Avoid generic answers - be client specific.

For the examination element 150 marks will be awarded in total with a maximum of:

• 10 marks available for summarising the client’s current situation

• 30 marks for the quality of communication.

Further details of the marking scheme can be found in the DipFA Student Handbook and you should look at this in detail. This will help to give ideas for your work to try to ensure you receive as many of the available marks as possible.

Unlike the coursework, where correct spelling and good grammar are essential, it is understood that in the pressure of a three hour examination, spelling and grammatical mistakes can creep in. This should not cause a problem. In this context, ‘quality of communication’ refers to how logical your report is and how well it communicates to the clients.

This includes ideas being clearly and concisely laid out, use of coherent arguments, a logical report that is well organised and structured, calculations shown if relevant, effective presentation of the report and technical jargon explained.

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What could go wrong?

You will miss out on marks if your report:

If you are not adequately prepared in advance, you may run out of time in the exam. One way in which this often happens is that a candidate finds an area that they feel confident in and spends too long on that topic. This can mean that a lot of time is spent in chasing an extra mark or two on that topic but then missing out on substantial (and often easier) marks later by running out of time.

We explain how to avoid these mistakes in Section Four.

Is not logical in its layout

Is repetitive in parts or 'jumps around' from point to point

Discusses points but makes no clear

recommendations

Makes recommendations but does not explain why they have been made

Uses jargon, which is not explained in plain

language

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Section Three: Study materials

The London Institute of Banking and Finance (LIBF) provides a variety of study materials and resources to aid you. It is important to use these when carrying out your preparation.

The DipFA Student Handbook This is available from your LIBF login and gives an overview of the DipFA qualification structure, objectives, aims, learning outcomes, assessment, learning resources, and policies and procedures. You should familiarise yourself with its content if you have not done so already, as it contains a lot of useful information. The handbook gives detail about policies and procedures and you can also seek advice, if required, from the Further Education Customer and Student Enquiries team during your studies, details of which are in the handbook. AFA manuals These will be sent out when your AFA session starts and you also have access to them online via your LIBF login. There are four different manuals: Taxation, Investment, Protection and Retirement. Example examination On your LIBF login (AFA) page you will find a link to the specimen assessments on the left hand side. When you click on this you will find three documents under the example examination. The first shows an example of a fact find, the second is the specimen exam which shows the type of additional information given to candidates on the day of the exam and the third is the exam exemplar with examiners comments added.

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Have a look at these to get an idea of what is expected with the task and what you will be required to produce in the examination. (Bear in mind that this was produced in a previous tax year.) KnowledgeBank Also available on your LIBF login, this is an online resource available for you to access library resources such as books and journals. AFA electronic exam demo On the LIBF login AFA page you will find a link to an electronic exam demo which is very useful if you have chosen to sit your exam on a typed, rather than written basis. This is in the form of a video that demonstrates the electronic exam and the functions that you will have available on the day.

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Section Four: How to use the time available

Your study time for this exam is split into two distinct sections: the time between coursework submission and your fact find being issued and the time remaining once the fact find is issued.

4.1 Before the fact find issue:

Between your coursework submission and fact find issue you will normally have around three weeks. While it is tempting to rest in this period after working hard on your coursework, it will be beneficial to prepare yourself for the fact find by:

. 4.2 After the fact find issue:

Once your fact find is issued you have 6 weeks until you sit the exam – don’t waste any of this valuable time!

As soon as the fact find is released, plan an outline for your report

Studying the AFA manuals in order to identify areas that you feel you are weaker on. This will enable you to brush up your knowledge for the fact find and also make sure you are prepared for any additional information on the day.

Looking at the specimen assessment material mentioned in Section 3. This is good to look at both now and when you are preparing your report as it will give you an idea of the type of report you are expected to produce on the day.

Familiarising yourself with any other resources available to you on the LIBF login.

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This should include:

• An introduction (which will include a summary of the fact find – it is important to pick up as many of the ten marks as possible for this). Include the client’s disposable income. This will be important so that you can later demonstrate the affordability of any recommendations you make

• Sections, separate areas of advice, in which options will be discussed and wherever possible recommendations made. For example, depending on the case study, possible sections may be: financial protection, savings and investments, mortgage repayment, retirement planning, estate planning.

• A conclusion

This gives a logical outline that in itself should allow you to pick up many of the 30 marks for quality of communication.

Next, write out your report in full. Don’t worry if this takes a lot longer than 3 hours at this stage. It may well need 4 hours or more at first. This will be your ‘model report’.

Then practice typing or writing out each section, at least a couple of times, preferably three or four times. Try to limit yourself to 30 minutes on each section. Some will often take far less than this so perhaps limit yourself to 20 minutes where there is less content. Make sure that you have planned the time for each section so that everything can be completed within 180 minutes.

So, for example, head up a blank piece of paper or Word document ‘Financial Protection’. Have the fact find in front of you (but not your ‘model report’) and then write or type away for 30 minutes. At the end of the allotted time, compare what you have written to the ‘model report’ and see what, if anything, you have missed.

Then head up a blank piece of paper or word document ‘Retirement planning’ and repeat the exercise.

If you keep practising in this way with each section, you will find that you speed up considerably and the limit of three hours will not be a problem on the day.

It will be useful to show your report to a friend, family member or colleague and ask if they feel that the recommendations (a) make sense and (b) are fully justified. This will help ensure that you have avoided jargon.

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4.3 Writing your ‘model report’

v Analyse the fact find and the client/s needs. Calculate their disposable income as you will need to include this in your introduction and later demonstrate affordability for any recommendations you make. Unless specifically asked to, you will not be required to show tax calculations in the report. So, with regard to disposable income, you normally simply need to have calculated beforehand the client’s income net of income tax and national insurance. (Avoid the temptation to refer to one of the websites that offers a net income calculator – the case study may contain features, such as pension contributions, which make the calculation client specific.) If there are any unique features, mention that these have been included in your calculation.

v Consider the advice areas that you will need to include in the report and break these down into sections. You need to consider what you are going to recommend for your clients (and may need to play around with different options) and investigate the costs of these. You need to ensure that the recommendations made are affordable for the clients.

v If an area is more around discussion rather than a specific recommendation, include both advantages and drawbacks (such as risks). This will ensure that the approach is balanced.

v If an area allows you to make a clear recommendation, do not offer the clients a choice of products/features. Simply state what you are recommending. For example, after having considered for an income protection insurance policy, whether to have a two month deferral (advantage of swifter payout) or six month deferral (cheaper premiums and client has the capacity to live off savings for this period) don’t offer the client the choice – recommend one term and then explain to the client why this is suitable for their needs.

v When recommending insurance policies, give an indicative premium. Don’t waste valuable time in researching the very best on the market – just make sure that your quote is a realistic one. This will then be later included in your affordability check

v As we discussed earlier, once you have prepared your report (aim to do this as soon as possible) the rest of your time should be spent practising it in sections, preferable three or four times. This will improve the flow and speed when writing the report as well as helping you to memorise the content.

Additional information

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The final part here is to consider any areas where you think there may be additional information on the day of the exam. This will allow you to prepare in advance.

For example, if you have a self-employed client it could be that the additional information on the day is around incorporation of the business. Therefore, before the exam you could investigate how this would work and also the benefits and drawbacks of this for the client.

Check whether you have all the information that you require on investments. For example, have you been given the original amounts that were invested? Have you been told whether there have been any withdrawals from a bond? (If not, this information may be given to you in the exam and you will be able to consider the capital gains tax and income tax implications. This is definitely something that you can work on in advance).

Have you been told whether there are any penalties from transferring from a pension or bond? If not, this may be additional information given on the day and will influence your advice

Is the client at or nearing retirement age? If so, it may be worth revising retirement options.

If the client’s attitude to risk is high/adventurous, it may be worth revising investments such as EIS, SEIS or VCTs

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Section Five: Structure of the report

The following gives ideas on the possible content of each section of the report. Please note this is not an exhaustive list but will give a good basis.

Introduction

• This should refer to the fact find. • State the date on which you met the client/s. • Briefly state the purpose of the report. • Methods of remuneration – you could include this briefly as a ‘nice to do’ but

time is tight in the exam so it should only be a single sentence. • Summarise the client/s current circumstances – bear in mind that under the

marking scheme summarising the client’s circumstances is only worth 10 marks so this should be a summary and not a repeat of all the information in the fact find.

• The net disposable income should be shown i.e. show the net income/s and also current expenditure to show the net disposable figure. It is not necessary to show the full calculations here but you should indicate how the figures have been arrived at.

• State the client/s stated objectives from the fact find and areas that will be addressed.

• Explain any assumptions made if information is missing - either here or as appropriate in the report.

• State the areas that are going to be covered in the report. Don’t worry if much of this repeats the clients own objectives. There may be one or two differences and also you need to set out the priority of advice (usually with financial protection ranking first). This also helps enormously with your presentation as you can then move straight into the sections.

Main body

• Break the report down into sections e.g. protection, retirement etc. • Include a section for any additional recommendations such as wills and

powers of attorney. • For each recommendation, explain why it is suitable for the clients’

circumstances.

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• Show all the features of a product (If for example, you are recommending income protection insurance, recommend a deferral period, own occupation, level of cover, term, guaranteed premiums, index-linked. Give a jargon-free explanation of each feature and why it is appropriate for the client).

• Show indicative premiums where appropriate so you can display affordability for the client/s.

• Use language that will be easy for a client to understand but will also demonstrate your technical knowledge for the examiner.

• Bullet points can be used as appropriate but if they are used, each bullet point should be a complete sentence and the report should not be mainly bullet points.

Summary

• Summarise your recommendations and demonstrate affordability. • Explain the next steps. • Mention the need for regular reviews in the future.

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Section Six: Examiner’s report

The following shows some general points highlighted from an examiner’s report on a previous examination. These points relate to (a) things that students should do or did do to pass or achieve a high mark as well as (b) areas where students have missed out on marks.

Use these points constructively when preparing for the examination. Where appropriate we have added a comment: these comments are not from the examiner:

Examiner’s points Our comments

The examiner comments on the fact that students who prepared well were able to produce a sufficiently detailed report that was comprehensive and worthy of being presented to a client.

Breaking it down into sections and the focusing on each one in detail will enable you to meet this standard.

It is expected that students will holistically cover the various areas of concern giving detailed and justified recommendations

Make sure that your recommendations are specific to the client’s needs, are sufficiently detailed and contain clear justifications.

Students achieving a high level pass mark were able to show they had considered the additional information provided in the exam paper and had tailored their comments and recommendations in line with this.

It is important to take into account the additional information given to you and incorporate this. Try to identify in advance, likely areas for additional information when preparing for the exam

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Time planning is really important for this exam. For a high level pass mark a full and complete report is needed and students not completing the report on the day did not receive a high level mark for content or communication skills.

Plan your time in advance of the exam and really stick to this on the day. Using sections, with 20 - 30 minutes on each one, can be extremely useful.

Most students produced a complete report in the exam but some struggled to produce a report that would be worthy of presenting to a client. The difficulty of producing this under exam conditions is recognised however, with the preparations time that they have, students are expected to produce a complete report with a logical order and organised structure.

As mentioned above preparation, practice and planning are key.

While credit is given for the communication aspects of the report, this is even when there are grammatical and spelling errors as the Chief Examiner recognises the pressures of producing this in the exam.

The main thing is to produce a well laid out report that gives clear messages to the client with clear recommendations. On the day of the exam do your best with spelling and grammar but as you can see the examiner appreciates the conditions that you are under.

The client wanted detailed advice on her protection arrangements and the examiner commented that firm and justified recommendations were expected.

Make sure, where appropriate, you give clear recommendations that also justify why this is suitable for the client.

Many students provided a significant amount of detail in the report’s opening section and some students provided

Take care not to spend too much time here at the expense of other areas of your report that will potentially generate

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additional detail that was not needed. you many more marks.

A lot of students repeated most of the facts from the fact find and exam paper but this was not necessary. As there are a limited number of marks available for the opening of the report a lot of students did not recognise this and gave too much detail in the opening section which wastes valuable time. There were instances where an excessive amount of detail took too much time and sometimes resulted in the report being incomplete.

Students are not expected to produce detailed calculations for income and tax liabilities in the exam. A summary of the client’s taxation position and details of how her pension income was taxed was sufficient. The client did have an age allowance so comments with regard to her tax status and personal allowances was required and was relevant as her income affected her age allowance. Students needed to generate income for the client and they should have shown how the new income would affect her tax position as well. Tax efficiency for the increased income was essential.

When showing income and expenditure it is not necessary to show full calculations. However, you should show the figures and what you have taken into account to reach these such as; tax, NICs, pension contributions etc. You should also highlight anything significant, if applicable, such as; age allowance, if the client loses their personal allowance due to level of income, company car tax etc.

In the protection section of the report detailed recommendations were required. Where students could have improved was mainly in relation to justification of recommendations, more comments on how recommendations had been arrived at, prioritisation of

Make sure to take into account existing policies/employer benefits and the suitability of these as well as considering the options for the client/s, prioritising and making recommendations that are justified and show suitability.

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recommendations and sufficient thought and detail on the client’s existing policies.

The exam paper asked for consideration of an EIS for the client and how this could help with the client’s planning. Most reports did not deal with this well and some students did not include this at all. Students were required to consider how this suited the client’s attitude to risk, but this was not always shown. There was a lack of detail on this in many reports and some students showed a lack of knowledge on the product.

As mentioned above it’s important to identify areas where you need to study from the manuals in order to ensure your level of knowledge is at a satisfactory level

With regard to IHT planning for the client some students did consider wider aspects of planning and lateral thinking with their recommendations such as; making use of existing investments and arrangements like a Discounted Gift Trusts (DGT). Some students handled this section well and others were poor with some technical inaccuracies being shown.

You are likely to know in advance that such an area needs to be addressed for the clients. Therefore, make sure to research fully around these areas so that the wider aspects of planning are considered and that you are also technically accurate.

Many students suggested the client look for lower risk funds in line with her attitude to risk without making comments with regard to the CGT liabilities of the fund switch.

When making recommendations you also need to consider the impact of taxation.

In many reports asset allocation was not dealt with to an appropriate standard.

You will be advised of the attitude to risk of the client so that it can be taken into account when considering the client/s existing holdings as well as when making any recommendations. It is quite

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common for existing assets not to match the client’s attitude to risk and this needs to be addressed in your report.

The exam paper requested details of Junior ISAs and NS&I Children’s Bonds and many students showed a lack of detailed knowledge on the Bonds. Many students were also inconclusive with their recommendations.

Again make sure your technical knowledge is up to scratch and that, where appropriate, recommendations are made and justified. If children or grandchildren are mentioned in the case study, perhaps in the context of school fees, then it is worth considering tax efficient investments available to children

Only a small number of students considered the investment holistically linking together various strategies and ideas.

It’s important to consider all of the information from the fact find, information given in the exam, the impact of recommendations and the way that the areas can link together e.g. using investments to generate income to supplement current pension income.

With regard to communication most reports had a logical order and were structured with headings showing a reasonable standard of communication. However, some reports were not presented in an appropriate and professional way. Some reports were not complete and were rushed in the later stages. Some students left out certain sections or gave headings with no content. A complete report suitable to issue to a client is required in the exam.

Overall make sure you are prepared and have practiced your report as well as ensuring knowledge is up to date. You need to produce your report on the day in a logical order with headings for the different sections so it is clear for a client to read. Finally, plan your time and stick to this on the day so that you do complete your report.

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Section Seven: Examples of additional information

You will receive additional information, usually around 5 pieces, on the day of the exam. To give you an idea of the types of information that are given, we include some examples from three past examiners reports:

• The exam paper confirmed that the client’s employer was planning to offer him a group Private Medical Insurance scheme and that he wanted an outline of factors he should consider before making a decision to join this.

• The client held an investment bond and this was traditional with profits. The exam paper confirmed the amount of the initial investment and also confirmed that the bond was held onshore, no market value adjustment would be currently applied and that no withdrawals had been made since it began five and a half years ago.

• The exam paper confirmed the client’s disappointment with the performance of his unit trust investment. It said that he wanted to switch the fund to a UK equity income fund and wished to receive details of the taxation consequences of switching funds.

• The paper stated that the client wanted details of the benefits and drawbacks of investing in exchange-traded funds (ETFs), as well as the types of funds generally available in ETFs.

• The exam confirmed that the client’s employer was going to change its stakeholder scheme so that it complied with auto-enrolment requirements and that he wanted to understand how this would affect both him and his employer with regard to their respective requirements and responsibilities.

• One of the clients held a unit trust and the fund was confirmed as US equities. The exam paper confirmed the amount of the original investment amount and that no withdrawals had been made with dividends reinvested. The other client also had a unit trust held in US equities. Again the additional information confirmed the original investment amount and that no withdrawals had been made with dividends reinvested.

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• The client held an offshore investment bond with details confirmed in the fact find. The exam advised that the client wanted to know about the benefits and drawbacks of keeping an offshore bond when compared to holding an onshore life assurance investment bond.

• The additional information confirmed that the clients wished to receive detailed information on the factors a financial adviser should consider when recommending a suitable provider for critical illness insurance, as well as how an adviser determines how this type of policy would be set up.

• The client held a large unit trust and on the day this was confirmed as being held in US equities and the date it was purchased. The further information also confirmed the amount of the original investment and that no withdrawals had been made.

• The paper advised that the client wanted to make gifts to her two grandchildren so she could help fund them through university. She wanted advice on whether Junior ISAs or NS&I Children’s Bonds would be the most appropriate to consider for this.

• The further information stated that with regard to inheritance tax planning the client wanted to receive information on how an investment in an Enterprise Investment Scheme (EIS) could be suitable.

As you can see from these examples in some instances it may affect the recommendations you are making and in others it will be a requirement to provide information to the client. Therefore, it is important to study from the AFA manuals as well as prepare your suitability report prior to the exam.

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Section Eight: Example of preparation

In order to illustrate a method of preparation, we include some details from a previous exam.

Firstly there will be a summary of the details that were given in the fact find prior to the exam. This will be followed by the key points that should have been considered based on the information from the fact find.

Note

This was based on the tax rates and allowances from a previous tax year.

These ‘key points’ are not a fully written suitability report and are simply notes (as opposed to the full grammatical sentences that will be required). However, based on the information from the fact find, this will give you an idea of some of the key areas that you would have been considering.

Where we have briefly mentioned features (e.g. guaranteed premiums, indexation for income protection insurance), in your report these need to be fully explained and justified

Please note the key points are not necessarily an exhaustive list and are not LIBF approved.

Fact Find details

(Please note this is a summary of the information provided in the fact find and is not in the same format as the fact find information from the LIBF).

• The clients (Richard and Helen) are a married couple both aged 42 in good health and Richard is stated as a smoker. They both have a retirement age of 60.

• They have two children (Olivia and Oliver) aged 5 and 3. • Richard is a self-employed jeweller working as a sole trader with taxable

profits of £60,000 but it is expected that in the current financial year this will increase to £120,000 and he takes all of this as drawings.

• Helen has been a recruitment consultant for 12 years and earns £50,000 which is made up of annual salary and bonus which is expected to continue at the current level. She has a final salary pension, would receive statutory sick pay if ill and does not know if she would receive any life cover from her employer.

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• The details across the fact find show total outgoings of £4,700 per month which includes; mortgage, bills, lifestyle expenses, a credit card, Richard’s pension and Helen’s monthly savings.

• The have the following assets: o House - £500,000 – joint o House contents - £65,000 – joint o 2 cars – total value £29,000 o Current account - £8,000 – Richard o Current account - £12,000 – Helen o Other bank accounts - £2,000 – Richard o Stocks and shares ISA - £16,000 – Richard – no contribution in the

current financial year o Unit trust - £82,000 – Richard – original investment £40,000 and in UK

equities o Unit trust - £285 – Helen – she has recently started saving £300 per

month into this and it is in European equities • They have a joint mortgage of £200,000 with 20 years remaining on a

base rate tracker of 3%. It is interest only and the payment is £500 per month.

• Richard has a credit card with a balance of £15,000 and a payment of £750 per month with no payment protection on it.

• Richard has a whole of life assurance which is not in trust with a £200,000 benefit costing £240 per month. It has a surrender value of £22,000.

• Helen has an income protection plan with a benefit of £2,000 per month to age 65 costing £60 per month.

• Richard has a personal pension set up 12 years ago with a retirement age of 65. The contribution is £1,000 per month gross and it is in a US equity fund. The current value is £120,000 with a transfer value of £110,000.

• Helen is currently in a final salary 80th scheme which started for her 12 years ago and has a retirement age of 65. Her contributions are 6% of her gross salary. If she takes any of the benefits before the age of 65 there is an early retirement penalty of 3% per annum. There is a pension commencement lump sum commutation factor of 10:1.

• Helen also has a previous pension which was a final salary 80th scheme that she was in for 7 years and has a retirement age of 65. This has a transfer value of £100,000.

• Richard has a medium to high attitude to risk and Helen is cautious.

The following shows the issues/priorities that were shown in the fact find:

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• They would like advice on whether their retirement funding is sufficient to allow them to retire on their joint target income of £75,000 gross per annum, in today’s terms. They wish to retire at 60 on this.

• Richard has been totally self-employed since the start of his business. He is considering taking on a trainee, and wants to know the taxation consequences of paying a trainee £20,000 per annum.

• They have heard about offset mortgages and want to know if this type of arrangement would suit them. They would like to see the benefits and drawbacks of this in the report.

• Their children will be educated at the local state school. However, they want detailed advice on funding for university fees. They expect both children will attend university at age 18 for three years and want £10,000 per annum, in today’s terms, for each child.

Key Points

Introduction

Personalise. For example: Dear Richard and Helen, it was a pleasure to meet you on 20th July. Following our meeting I have prepared the following report which summarises your current situation and addresses your objectives which we can discuss further at our next meeting.

Mention agreed method of remuneration

Summarise the information given:

Personal circumstances: Richard, age, self-employed jeweller, Helen, age, employed recruitment consultant, marital status, health, two dependent children

Assets Briefly list and show total of assets

Liabilities Confirm £200,000 interest only mortgage 20 years left and £15,000 credit card

Protection Show brief details of existing policies/cover

Retirement provision Richard existing personal pension £120,000 and Helen currently in final salary occupational and also have a deferred final salary scheme

Attitude to risk: Confirmed as medium for Richard and cautious for Helen

Client objectives: You confirmed your objectives as follows:

• Advice on retirement funding sufficient to retire on £75,000 at age 60

• Information on the taxation consequences of Richard taking on a trainee paying them £20,000 per year

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• Information on the benefits and drawbacks of an offset mortgage

• Advice on funding for university for Olivia and Oliver with a total of £60,000 to be available for this

Income

Expenditure

Current monthly outgoings total £4,700 includes £800 per month net for pension and £300 per month for Helen’s savings

This shows a surplus of £2,000 currently and £4,565 when Richard’s income improves

The next step is to tell the client the sections that will follow. As we are considering this holistically, these will go further than their stated objectives. For example we will include financial protection and a review of savings and investments. This can be covered in a single sentence with bullet points e.g.

Richard• £60,000 or £120,000 show net income for both and base affordability on the lower figure – taking into account tax, national insurance, pension contributions and loss of part of personal allowance for the higher figure

• £60,000 gross is £45,715 net or £3,810 monthly

• £120,000 gross is £76,515 net or £6,376 monthly

Helen• £50,000 including bonus - £34,667 net - £2,889 monthly – taking into account pension contribution, tax, national insurance and contracted out

Coniston Press


Based on the above, I now include the following areas in my report

Immediate improvements

Financial Protection

Retirement provision

University fees

Mortgage repayment

Financial implications of taking on a trainee

Other recommendations

This allows you now to go straight into the various sections. Some of these will only take a few minutes but for the major sections, such as protection, make sure that you stick to the time that you have already planned (20 – 30 minutes)

Immediate improvements

Pay off credit card using money from current accounts (£10,000) and from Richard’s unit trust (£5,000) saving £750 per month reducing outgoings to £3,950. Leaves £10,000 in current accounts and £2,000 in savings – emergency fund

Financial Protection

Explain that this is included as lifestyle of survivor and recommendations will be adversely affected if either were to die or become ill, so protection seen as most important area

Show main areas to consider

• Protection in the event of death

• Maintaining living standards if unable to work due to accident or illness

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• Ability to cope in the event of suffering a serious illness

• Private medical insurance

Mention State benefits only offer a breadline existence, so are not included here

Both in good health – Richard being a smoker will increase premiums

Mortgage Protection

Nothing in place for the mortgage

Consequences if either were to die or become seriously ill

Recommend joint LTA and CIC for £200,000 for 20 years

Explain/justify why joint life first claim

Protection in the event of death

Helen, ask to confirm DIS although this could be lost if change employer

Ask to confirm nomination of beneficiary up to date

Richard, ask to confirm the reason for the whole of life (WOL) policy

Consider cancelling the WOL as appears not to be appropriate to their circumstances The £22,000 surrender value this money could also be used to clear the credit card - £240 pm saving if cancel

If keep the WOL recommend the plan is placed in trust

Even if mortgage paid in the event of death, there will still be financial consequences/shortfall .

Richard – recommend FIB or LTA – term 18 years – link to level of outgoings required to cover or net income

Helen – recommend FIB or LTA – term 18 years – link to level of outgoings required to cover or net income

Show costs and justify

Recommend placed in trust for each other

Protection in the event of illness/accident

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Show current level of benefit for Helen, ask to confirm deferred period

Consider if the level of cover sufficient – 60% or earnings would be £2500

Richard – nothing in place if off work as a result of long term sickness and savings/investments would run out quickly

Show financial consequences

Recommend income protection insurance (IPI) for 60-65% of income, detail why less than 100%

Consider would you cover the £60,000 or £120,000

Perhaps £60,000 at 65% = £3250 per month is a good starting point and can investigate a higher level of cover when consistent increase in earnings (couldn’t really insure the higher figure yet as if claimed in the first 12 months would not pay) – also bear in mind that the £120,000 may also be paying a trainee

Recommend £3250 per month cover, indexed with 13 week deferred period to keep cost down and can rely on emergency fund for the 3 months and show cost

Income protection insurance to include indexation, own occupation, guaranteed premiums

Protection in the event of serious illness

No cover yet in place but have recommended critical illness cover (CIC) for the mortgage

If full IPI in place this is less of a priority but a lump sum could be useful for any major changes such as needing to amend the home in the event of disability

Could look at 1 or 2 times income each to retirement age

Recommend critical illness cover and show cost

Protection to meet medical costs

No PMI in place

Explain what this plan does and the importance for Richard self-employed and Helen with no sick pay

In the event of illness this could allow speedy treatment and a quicker return to work

Recommend comprehensive cover – could consider family cover so children would benefit as well- need to consider if this is affordable

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Show cost

Total costs:

Show total costs of plans recommended plus can keep IPI for Richard under review

Retirement provision

Objective is to retire at 60 with a joint target annual income of £75,000 in todays money

Show existing provision for both

Check nomination of beneficiaries up to date for all current and deferred schemes

Retirement ages of both schemes 65 which is a mismatch

Show state pension ages of 67 for both

Request BR19 to the Department of Work and Pensions to confirm state pension – likely to be only basic for both

Richard

Current fund £120,000 would provide approx. £6000 based on annuity rates (assume no PCLS taken) with growth allowing for inflation

Consider all US equity perhaps slightly higher than medium attitude to risk

Consider additional funds for diversification

Helen

Current £20,000 x 30/80 = £7500 however 15% penalty for taking at 60 (therefore reducing to £6375).

Deferred - assume £20000 x 7/80 = £1750 – possible reduction for taking early as well – also gives £100k transfer value which appears to give higher benefits based on an annuity rate?

Based on Helen’s contributions that will be index linked show shortfall taking into account £120k fund already built up in today’s money

Unable to afford full amount so recommend additional contributions as a starting point

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Richard – could use PPP, SHP or possibly SIPP if perhaps wanted to bring a business property into the fund

Helen – could use AVCs

Both higher rate taxpayers so will get higher rate relief on contributions

Savings and Investments

Confirm objective re saving for school fees

Briefly overview existing savings and investments

Show current CGT liability with unit trusts

Confirm attitude to risk

Compare portfolio match to risk profile – Richard perhaps a little too much in equities for medium and European equities not a match for Helen

Could give indication of asset class spread for each

Need to maximise ISAs

Richard could transfer unit trusts into ISA

Helen, cautious so consider cash (could redirect regular savings to this) and stocks and shares

Consider transfer half of unit trusts to Helen so both CGT allowances can be used

However, not a fit with her attitude to risk so would require fund switch raising a possible CGT liability – care should be taken here

University fees

Clarify why £10,000 - will this be sufficient?

Will 3 years be enough as some courses longer?

Take inflation into account for the £30,000 each based on 4% inflation - state assumption made

Use a fees calculator

Show amounts needed for each child

Show methods of saving for this

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Deposit/stocks and shares etc.

Consider will this be in the parent’s or children’s names and appropriate product

FSCS: Mention the limits applicable and any possible consequences

Mortgage

Specifically asked for pros and cons of offset

Show pros and cons including:

• Pros

• Reducing amount of interest paid

• If overpayments are made the mortgage could be cleared in less than 20 years

• Flexibility

• If the mortgage is 3% this is the effective rate on the savings

• Tax benefit on savings income

• Lump sum of money would still be accessible if required

• The amount of offset can be varied

• If credit card not paid off this could be included in the arrangement to reduce costs

• Cons

• Need deposit based savings for this arrangement to be really successful

• Can often be higher rates compared to other comparable mortgages

• This requires discipline as temptation is there to take money out

• Of less value in times of lower interest rates

• Doesn’t solve the problem of lack of repayment vehicle

Highlight could cash in unit trusts and place in in cash to try and make this work, however would incur a CGT bill – show – possibly spread over different years and could transfer to spouse to use both allowances

Coniston Press


Mortgage into retirement – could reduce term or pay from pension income – if reduce lower life/CIC cost

Highlight no vehicle in place to repay the mortgage and the importance of making an arrangement as soon as possible

Briefly mention the options – repayment, savings vehicle, pension and show cost of repayment and savings vehicle as well as the size of pension fund needed to use that plus impact on retirement provision

Financial implications of taking on a trainee

Assume that a trainee will only be taken on once Richard’s income has increased

Assume trainee will only receive salary and no other employee benefits

Consider will need to make up to 3% pension contribution with the start of auto-enrolment

Tax and National Insurance (NI) would be reduced for Richard.

There will be no NI on the trainee’s salary as this will be covered by the annual Employer Allowance.

Tax savings:

£20,000 x 40% = £8,000

In addition would now receive a full personal (£11,000 instead of £1,000) ie allowance £10,000 x 40% = £4,000

Effect on National Insurance

Saving of £20,000 x 2% = £400

Secondary threshold is £156 per week which is £8,112 annually

£20,000 - £8,122 = £11,888 x 13.8% = £1,641

Show net costs with savings and employers NICs

Also need to collect and pay tax and NICs for employee using PAYE so admin cost

Other recommendations

Wills

Coniston Press


Not clear if wills in place, if not estate would be subject to rules of intestacy

Explain benefits of having a will including stating guardianship of children

Recommend seeing a solicitor to set up

Power of Attorney

Explain what a power of attorney is and the benefits of a lasting power of attorney

Never too early to set this up

Financial and Personal welfare LPA

Consider who could be the attorney, perhaps each other plus one other person – still in force if mentally incapacitated

Allows you to choose in advance who would help look after your affairs

Recommend see solicitor to each set up, could be done in conjunction with will.

Summary

Summarise recommendations and demonstrate affordability (including potential increase in mortgage payment), any areas to discuss at next review, next steps, reviews in the future.

Coniston Press


Section Nine: Planning your time

Planning your time on the day of the exam

As already mentioned, time can be very tight in the exam so it’s important to stick to a pre-prepared plan. This will ensure a complete report is produced on the day that takes into account the additional information provided.

You could consider the following as key chunks of time in the exam:

The timings above are here as a general guide. Any time left at the end should be spent checking your work.

Summary and review – this section will include a brief summary and the cost of recommendations, any actions/next steps and it should mention reviews in the future. It

is reasonable to allow 15 minutes for this section of the report.

Main body – this section of the report will be broken down into different sections such as; protection, retirement, savings/investments, IHT planning, other recommendations etc. You will also be including the incorporation of any additional information provided on the day. It is reasonable to allow 120 minutes for the main body of the report and you should break this down further in advance of the exam to plan how long you will

spend on each section. Of course some areas will be larger than others depending on the needs of the client.

Introduction – this section of the report will include; a personalised opening, a summary of the client’s current situation, client objectives/needs, current affordability

(income and outgoings) and attitude to risk. It is reasonable to allow around 20 minutes for this with an absolute maximum of 30 minutes.

Preparation – note down your structure and any key points you want to ensure you remember in the exam. You can also use this time to decide how you will deal with the additional information provided on the day of the exam. It is reasonable to allow around

15 minutes for this.

Documents

How to succeed with the AFA examination · 2020-03-11 · AFA electronic exam demo On the LIBF login AFA page you will find a link to an electronic exam demo which is very useful