Risk Assessment and Management Flashcards

Which of the following is the primary purpose of a risk management framework within a financial advice practice under FASEA?

Answer: To systematically identify, assess, and mitigate risks to clients and the practice

A risk management framework provides a structured approach to identifying and addressing risks, supporting both client protection and practice integrity.

Under FASEA's Code of Ethics, 'Standard 6' relates to managing conflicts of interest. Which of the following is an example of a conflict that must be disclosed and managed in risk advice?

Answer: An adviser recommending an insurance product from which they receive a trailing commission

Trailing commissions from insurance products create a financial conflict of interest that must be disclosed and managed under FASEA Standard 6.

When assessing a client's risk profile, which combination of factors must an adviser consider to satisfy FASEA's best interests obligation?

Answer: Risk tolerance, risk capacity, investment timeframe, and financial objectives

A comprehensive risk profile requires integrating risk tolerance, capacity for loss, timeframe, and specific financial goals, not just isolated factors.

A client's risk profile was assessed two years ago and has not been reviewed. The client has since retired. What is the adviser's obligation?

Answer: Update the risk profile to reflect the client's changed life stage and circumstances before providing further advice

Life events such as retirement materially change risk capacity and objectives, requiring an updated risk profile before new advice is provided.

Which type of risk is most directly managed by diversifying a client's portfolio across multiple asset classes?

Answer: Concentration risk

Diversification across asset classes directly reduces concentration risk by avoiding over-exposure to any single investment or sector.

FASEA requires advisers to act with 'competence' when providing risk advice. Which action best demonstrates this standard?

Answer: Maintaining knowledge of risk management principles and product risk characteristics through ongoing CPD

Competence under FASEA Standard 5 requires advisers to maintain current knowledge and skills, including through continuing professional development.

A client insists they have a high risk tolerance but their financial circumstances indicate very low capacity for loss. Which approach aligns with FASEA obligations?

Answer: Recommend investments aligned with the lower capacity for loss and clearly explain the reasoning to the client

Capacity for loss represents an objective constraint; advice must not expose clients to losses they cannot financially absorb, regardless of stated tolerance.