Risk Assessment and Management Flashcards

Under FASEA's framework, which document serves as the primary written record of a risk-based advice recommendation and its justification?

Answer: The Statement of Advice (SOA)

The Statement of Advice is the legally required document that must set out the advice, its basis, and any significant risks relevant to the client.

Which of the following scenarios most clearly demonstrates the risk of 'scope creep' in financial advice?

Answer: An adviser recommending a product outside the agreed advice scope without client consent

Scope creep occurs when an adviser provides advice beyond the agreed and authorised scope, exposing both the client and the practice to unmanaged risks.

FASEA's ethical framework classifies which of the following as a 'non-financial risk' in a client's advice situation?

Answer: Client cognitive decline affecting decision-making capacity

Cognitive decline is a non-financial risk that can impair a client's ability to make informed decisions, requiring additional care and safeguards from the adviser.

An adviser recommends an aggressive growth strategy to a client without conducting a formal risk assessment, relying instead on verbal discussion. This most likely breaches which FASEA obligation?

Answer: Standard 8 — acting with care and diligence

Standard 8 requires advisers to take reasonable steps to identify client objectives and circumstances, which includes conducting a proper documented risk assessment.

Which of the following best describes 'sequencing risk' in the context of retirement advice under FASEA?

Answer: The risk that poor investment returns in the early years of retirement permanently reduce portfolio longevity

Sequencing risk refers to the danger that early negative returns in retirement can permanently deplete capital before markets recover, a critical consideration in retirement planning.

A financial adviser receives a referral fee from a risk insurance provider. Under FASEA, which is the minimum required action?

Answer: Disclose the referral fee to the client and manage the conflict before providing advice

FASEA Standard 6 requires disclosure and management of all conflicts of interest, including referral fees, regardless of amount.

Which risk management tool is most appropriate for a client who needs life insurance coverage but has limited premium budget?

Answer: Recommending term life insurance to provide adequate cover at a lower cost

Term life insurance offers cost-effective pure death cover without investment components, making it suitable for budget-constrained clients needing adequate protection.