FASEA Risk Assessment and Management 3 — Questions and Answers
Question 1: Which of the following is the primary purpose of a risk management framework within a financial advice practice under FASEA?
- To minimise the number of compliance documents the practice must maintain
- To systematically identify, assess, and mitigate risks to clients and the practice (Correct answer)
- To restrict the range of products an adviser can recommend
- To replace the need for professional indemnity insurance
Correct 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.
Question 2: 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?
- An adviser recommending a low-fee index fund with no commission
- An adviser recommending an insurance product from which they receive a trailing commission (Correct answer)
- An adviser charging an hourly fee for risk assessment services
- An adviser referring a client to a solicitor for estate planning
Correct 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.
Question 3: When assessing a client's risk profile, which combination of factors must an adviser consider to satisfy FASEA's best interests obligation?
- Age and income only
- Risk tolerance, risk capacity, investment timeframe, and financial objectives (Correct answer)
- The client's preferred asset class and market outlook
- The adviser's product list and the client's risk category from a questionnaire
Correct 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.
Question 4: 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?
- Continue using the existing profile as long as the client has not complained
- Update the risk profile to reflect the client's changed life stage and circumstances before providing further advice (Correct answer)
- Provide advice based on the original profile but note in the file that circumstances may have changed
- Wait until the next annual review date to update the profile
Correct 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.
Question 5: Which type of risk is most directly managed by diversifying a client's portfolio across multiple asset classes?
- Inflation risk
- Systemic risk
- Concentration risk (Correct answer)
- Regulatory risk
Correct answer: Concentration risk
Diversification across asset classes directly reduces concentration risk by avoiding over-exposure to any single investment or sector.
Question 6: FASEA requires advisers to act with 'competence' when providing risk advice. Which action best demonstrates this standard?
- Relying on product provider research without independent review
- Maintaining knowledge of risk management principles and product risk characteristics through ongoing CPD (Correct answer)
- Outsourcing all risk assessments to a paraplanner
- Using a standard template SOA for all risk-related recommendations
Correct 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.
Question 7: 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?
- Accept the client's self-assessment and recommend high-risk investments
- Recommend investments aligned with the lower capacity for loss and clearly explain the reasoning to the client (Correct answer)
- Split the portfolio equally between high-risk and low-risk assets as a compromise
- Decline to provide any advice due to the discrepancy
Correct 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.
FASEA Risk Assessment and Management 3
Which of the following is the primary purpose of a risk management framework within a financial advice practice under FASEA?