Risk of David inv trusts
Cuz
Main Risks
Inflation
Taxation
Interest
Liquidity
Currency
Diversification
Non systemic
Market systemic
Default
Inflation / spending power of an asset/fixed income is eroded.
This will have an impact on David and June on the purchasing power of fixed income and pension benefits and the value of investments
Taxation - Tax legislation can change, changes in the future may make tax treatment of investment and pensions less advantageous
Interest - Rates can vary/fluctuate - Falls in interest could reduce the interest on savings, reducing essential income. An interest rate rise will reduce value of fixed interest assets
Liquidity- Assets may be illiquid when cash is needed/ cannot partially encash - often main assets is the home or commercial property held within a SIPP
Currency - exchanges rates can vary and be volatile - changes in exchange rates will affect the value of non sterling assets
Diversification/concentration- Too many eggs in one basket either assets class or geographic area -without diversification higher chance of making a loss if the investment held fall. Portfolio needs to be rebalanced and monitored to maintain their desired asset allocation
Non systemic - risk of a company failing / any equity fund is subject to risk of individual holdings failing
Market systemic- value of stock market can fall - equity asset classes held are exposed to market volatility
Default/provider - investment provider may not be able to pay monies invested - assets held may be in excess of FSCS compensation limits or may not be protected at all
Describe process of using a risk profiling tool
- both clients complete a questionaire
- this focuses on their priorities, time scales and circumstances
- the answers are then fed into a computer software
- this deduces the risk score
- the score is used to produce a recommended asset allocation
- which often uses the efficient frontier for investments
- this result will then be discussed with both of them
- to ensure it matches with their interpretation of risk
State 4 limitations of using an asset allocation model is cash flo
- Charges are not taken into account
- it does not recommend an appropriate tax wrapper/ does not take into account the clients tax status
- questions asked are not always relevant to clients circumstances
- different models produce different results
- underlying assumptions are subject to change based on historical data
- Needs to be reviewed/ only relevant at a specific point in time
Key risks for purchase of holiday home
- It will be an illiquid investment, which will be a problem if they require funds quickly
- Changes in legislation may lead to the CGT payable on sale increasing
- Costs of purchase and up keep may be higher than expected
- Their overall portfolio will have a large amount invested in property and property prices may fall
Keys risks of David’s and June’s various cash holdings
Inflation - Spending power may be eroded over time
Default - Of BK bank becomes insolvent only 85k of David’s cash holdings will be protected by the FSCS
Interest rate - rates could remain low/ fall further
Taxation- Tax rules may change and increase tax payable on interest.
Risks of David’s Global Equity Investment Trust
- Gearing may increase volatility/level of risk involved and this may increase any losses
- May lack liquidity if fund is not traded daily
- May be traded at a discount when David wishes to sell and so proceeds may not reflect the underlying value
- Holdings may be negatively impacted by exchange rate movements
- The investment lacks diversification as the vast majority of holding will be in equities
