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A question of ethics

This is the second of a series of articles that are designed to aid those looking to deepen or refresh their financial advice knowledge as the industry faces up to level four. This article will look specifically at ethical investing and focus on how to prepare for a short question on the subject from the ifs School of Finance’s DipFA exam

Like all questions on the DipFA programme, this is intended to reflect the kind of scenario that advisers could encounter with clients. The growing interest in social and environmental issues means it is an increasingly relevant area and one likely to become more important for clients in years to come.

In this article, we will look at how the subject fits into the DipFA syllabus and examine some common technical terms through the use of a client scenario and model answer. We will also offer tips on how to answer the specific exam question used here as well as more general questions on the topic.

Ethical investing forms part of the wide-ranging DipFA syllabus. We provide students with access to a wealth of resources about ethical investing. As part of their studies, students will learn about the types of ethical decisions companies make and how fund managers can influence these decisions. Students will learn how companies and funds are classified for ethical investing and become familiar with researching sources such as the Ethical Investment Research Service.

Eiris researches and screens global companies on the basis of their ethical stance. Impartial sources like this are helpful for research purposes and include some specific industry terms that not all clients will recognise. Being able to explain the various terms to clients in a clear, non-jargon way is equally important and is itself one of the core principles underlying the RDR. The sample question we use here examines some distinct terms important in communicating the features of anethical investment to a client.

The question is taken from an Advanced Financial Advice coursework assignment. The DipFA consists of two units; financial planning principles which is assessed by an objective test, and advanced financial advice which is assessed by a coursework assignment and final written exam. Although this is a short question that counts for just 4 per cent of the total marks of the overall assignment, it provides a good example of the application of knowledge that examiners are seeking.

Tips for answering this question

(These are for the reader and do not form part of the coursework)

1: Students should first take note of the amount of marks available. In this question, there were six, so students can assume there are two marks each for engagement, preference and screening.

2: Students should read the question again and pick out the key parts, that is, the client knows little about ethical investments and he requires explanations of the terms engagement, preference and screening.

3: The fact that the client has limited knowledge of ethical investments highlights the language and style to be used, that is, clear, concise and no jargon!

4: Students should focus on the key verb in the question, in this case ’explain’.

5: Students should now know that they need to provide a clear and concise explanation aimed at a client with little knowledgeknow there are two marks available for each of the three explanations.

6: Present your answer logically and neatly.

The following student’s response scored maximum marks:

Engagement: this is often referred to as positive engagement. This happens where a fund manager will actively encourage the institution to improve its stance on areas such as climate change, deforestation and human rights. They do this by using their shareholding to influence corporate strategy, entering discussions with company management or using publicity to apply pressure on companies.

Screening: fund managers use both positive and negativescreening when deciding in which companies to invest. Positive screening is a practiceof including companies on the basis of specific criteria – it might be because of their policies on community involvement or a company that has adopted an environmentally friendly policy on forestry reduction. Negative screening is a practice of excluding companies from investment.This might be because the company is involved in some of the following areas: animal testing, alcohol production and sales, human rights violation.

Preference: this is where funds adopt social, environmental or other ethical guidelines when considering in which companies to invest. The fund managers will prefer companies that meet their own standards and will select these companies ahead of others when all things are equal such as financial performance.

General tips for answering questions

  • Start by putting together a rough structure for your answer, or write out a list of areas that you should cover, including some of the key point.
  • Bullet points can be a very good way of presenting information, because it helps organise the information. This helps the examiner when marking the answers. In this context each bullet point should be a full sentence, or even a number of sentences.
  • Do all you can to help the examiner – structure the answer so that the reader canfollow it easily. This will also help you and ensure you don’t miss any important points. Imagine that the examiner is your client and formulate your answers accordingly. Think all the way through, how woul another person interpret what I am saying?
  • Present information in clusters of related areas rather than randomly. For example, cover all the points about the product’s structure first, then benefits, then taxation, etc.

The DipFA is heavily focused on applied knowledge and this means students really need to think about the answers from a client’s perspective. Clients want to be able to pick out the key points easily, something that is relevant both for the exams and assignments and, of course, real life

Technical terms

Your client, John Knowles, has a strong preference for ethical investment but knows little about it. He has asked you to explain the various technical terms, in particular he has heard of engagement, preference and screening. Explain what is meant by the terms engagement, preference and screening


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