The topic of investment is a wide-ranging area for financial advisers to know and understand, with a huge range of products. Products differ in a variety of ways including, asset class, level of risk, tax implications, whether they aim to produce income or capital gains, to name but a few. As well as understanding the nature of different investment products and the theories behind them, advisers must also understand the impact the national and global economy has on various investments. In the current regulatory and economic climate, it is crucial that advisers are able to analyse the full range of investments available to recommend those products best suited to their
With the benchmark adviser qualifications being raised from level three to level four, there are a number of investment related areas where
advisers can enhance their knowledge.
Investment is heavily featured in the ifs School of Finance’s diploma for financial advisers (DipFA), a NQF level four qualification, which provides students with tailored resources to tackle the multitude of topic areas involved.
As part of the DipFA learning materials, each topic area has its own ’Subject Gateway’. The ’Gateways’ present specialist reading resources for students and finish with questions and answers to test students’ understanding of the subject.
As an example of the diversity of investments, the ’Investment Gateway’ covers the following list of topics:
- Eonomic views
- The credit crunch
- Portfolio risks and returns
- Risks and returns of investment products
- Features and taxation
- Special share issues
- Alternative investments and derivatives
- Portfolio construction/ asset allocation, wraps, supermarkets
- Performance of portfolios
- Venture capital trusts
Although not an exhaustive list, the bullet points highlight the main areas under the heading of “investment” in which a DipFA qualified adviser
should be able to offer sound advice to a client.
One of the major steps up to becoming a level four adviser is the expectation of higher analysis skills. The DipFA typically asks students to ’analyse and evaluate’, improving on the skills of ’knowledge and understanding’, which are more associated with a level three qualification.
An example of the increase in the skill levels expected is demonstrated by the following questions which form part of the DipFA
They are taken from the question and answer section at the end of the ’Investment Gateway’. Students are expected to have completed the reading of the tailored resources before attempting the questions.
The questions ask students to assess the impact the economy has on investments and the process and effects of quantitative easing, a now common phrase.
Students are advised to formulate their own answers as part of their studies and for this article a suggested model answer is provided. This answer uses bullet points to answer the question, a format that is particularly useful for a question where candidates are asked to “outline” or “list”. Bullet points clearly identify each point being raised but are less suitable when a more detailed response is required
The following section is taken from the DipFA ’Investment Gateway’ questions and answers.
The government has embarked upon a programme of quantitative easing.
Answers: the key points
The objective of quantitative easing is to stimulate the economy by the creation of new money in the economy.
The new money is available for spending, which should boost the economy.
The Bank of England effectively creates new funds to buy assets from private sector institutions – insurance companies, pension funds, banks or nonfinancial firms. The creation of new funds is often referred to as “printing money” although it is only a notional electronic credit rather than a real transaction.
The objective of easing is to stimulate the economy by the creation of new money. The money is available for spending
The purchased assets usually take the form of gilts (which results in a speedy increase in the money supply) or high quality bonds (debt) from private companies or institutions.
The money is credited to the seller’s bank account, which increases the abilityof that organisation to raise of that organisation to raise money through credit, backed by the newly created reserve from the government.
The theory is that the additional borrowing capacity will allow banks to lend more money to customers and companies will be able to invest more. Either way the intention is that more money will filter through to stimulate the general economy.
Initially, the price of gilts has risen as a result of the Bank of England buying up these government bonds.
The increase in gilt prices has resulted in gilt yields falling, which in turn should bring down the cost of borrowing generally. However, this initial trend could be reversed, as the market for new gilt issues may become saturated.
The gateway questions and answers do not form part of the summative assessments, however the clear and concise nature of the ’model’ answers underpin the communication style that is fashioned by the Retail Distribution Review, a style that runs throughout the DipFA qualification. Qualified advisers are expected to communicate to their clients and peers in a clear and concise manner, so the DipFA assessments require the same exacting standards.
Outline the objective of quantitative easing and how the Government hopes this objective will be achieved.
What is usually the initial effect of quantitative easing upon gilt prices and their yields?