CISI IAD Client Suitability and Alternative Investments

Question 1

What does 'suitability' require of an investment adviser when making a personal recommendation?

Accepted Answer

The adviser must gather sufficient information about the client's financial situation, investment objectives, risk tolerance, capacity for loss, and knowledge and experience to ensure the recommendation is appropriate for that specific individual

Answer

The adviser must recommend the cheapest available product

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The adviser must demonstrate that the investment has outperformed the FTSE 100 over the past five years

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The adviser must obtain the client's signed approval before making any recommendation

Question 2

What is 'capacity for loss' and how does it differ from 'risk attitude'?

Accepted Answer

Capacity for loss assesses the financial ability to absorb losses without undue hardship; risk attitude measures the psychological comfort with taking risk — both must be assessed independently

Answer

They are identical concepts expressed differently

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Capacity for loss is regulated; risk attitude is not

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Risk attitude is measured objectively; capacity for loss is subjective

Question 3

What is a 'vulnerable customer' in the context of FCA Consumer Duty?

Accepted Answer

A customer who, due to their personal circumstances (such as age, health issues, bereavement, financial difficulty, or cognitive decline), is at heightened risk of harm if their needs are not properly considered

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Any customer who complains about a firm's services

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A customer with an investment portfolio below £50,000

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Any first-time investor regardless of age or health

Question 4

What is the purpose of a 'client agreement' (or terms of business) in investment services?

Accepted Answer

A document that sets out the terms of the relationship between adviser and client, including the services provided, charging structure, and the client's obligations, giving both parties clarity before the relationship begins

Answer

To commit the client to maintaining a minimum investment amount

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To limit the adviser's liability for poor investment performance

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To commit the firm to guaranteeing specific investment returns

Question 5

What is a 'hedge fund' and what key characteristics distinguish it from a retail fund?

Accepted Answer

A typically lightly regulated, private pooled investment fund using a wide range of strategies — including leverage, short selling, and derivatives — usually available only to sophisticated institutional and high-net-worth investors

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A fund exclusively investing in equity derivatives as a hedge against market falls

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A fund of funds structure investing exclusively in government bonds

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A fund that passively tracks a market index while hedging currency risk

Question 6

What is 'private equity' as an asset class?

Accepted Answer

Investing in shares of companies that are not publicly listed, typically involving buyouts, venture capital, or growth capital, with a long investment horizon and illiquid nature

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Investing in the equity of small listed companies on AIM

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Holding private placement government bonds

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Investing in real estate investment trusts (REITs) through a private arrangement