Risk Assessment and Management Flashcards

Under FASEA standards, when a client requests advice that the adviser believes is inappropriate given their risk profile, the adviser must:

Answer: Provide the client with written reasons why the advice may not be in their best interests and document the outcome

Advisers must clearly communicate and document concerns about advice that conflicts with the client's best interests, even if the client ultimately proceeds.

Which of the following risk factors is most relevant when assessing the appropriateness of a geared investment strategy for a client?

Answer: The client's debt serviceability and ability to meet margin calls under adverse conditions

Gearing amplifies both gains and losses; assessing a client's ability to service debt and meet margin calls under stress is essential before recommending leveraged strategies.

A client aged 35 with a 30-year investment horizon and stable income asks for a very conservative portfolio. The adviser should:

Answer: Explore whether the client's risk tolerance reflects their actual long-term interests and document the discussion

While respecting autonomy, advisers must explore mismatches between conservative risk tolerance and long-term objectives such as wealth accumulation, documenting the conversation.

Which of the following is a key indicator of 'liquidity risk' within a client's investment portfolio?

Answer: Significant investment in unlisted or illiquid assets relative to the client's near-term cash needs

Liquidity risk arises when illiquid holdings cannot be readily converted to cash to meet the client's near-term financial needs.

FASEA's ongoing service obligations require an adviser to review risk advice when:

Answer: There is a significant change in the client's personal or financial circumstances

Significant changes to client circumstances—such as job loss, inheritance, or health changes—trigger an obligation to review and potentially update risk advice.

Which FASEA ethical value is most directly compromised when an adviser recommends a higher-risk product to earn a larger commission?

Answer: Fairness

Recommending a product based on commission rather than client suitability is fundamentally unfair and violates the client's entitlement to unbiased advice.

A risk management plan for a financial advice practice should include which of the following to align with FASEA's regulatory expectations?

Answer: Procedures for identifying, assessing, monitoring, and mitigating risks to clients and the practice

FASEA expects licensees and advisers to have documented risk management procedures covering the full risk lifecycle: identification, assessment, monitoring, and mitigation.