Pass the CISI level 3 Certificate in Wealth & Investment Management ICWIM Questions and answers with ValidTests

Defined Benefit Pension Scheme:

This scheme provides a fixed, pre-determined income in retirement based on factors like years of service and final salary.

The employer assumes the investment and longevity risks, ensuring predictability for the employee.

Elimination of Other Options:

A: Contributions may be required from the employee, depending on the plan.

B: Index-linking to inflation is a feature of some schemes but not universal.

D: Investment performance is not guaranteed but managed by the employer.

References:

ICWIM Module 5: Discussion on pension types and benefits.

Why Affordability is the Major Constraint

A client’s ability to mitigate risks is directly limited by their financial resources.

Even the most sophisticated risk strategies, such as diversification, derivatives, or insurance, require financial capacity.

Other Options Analyzed

Age: Impacts risk tolerance but does not constrain the financial ability to manage risks.

Risk aversion: A behavioral factor, not a financial constraint.

Tax implications: Important but secondary compared to affordability.

ICWIM Textbook, Chapter on Investment Constraints: Highlights affordability as the top financial constraint.

Wealth Planning Principles: Discusses practical limitations of risk mitigation strategies.

ReferencesThus, the answer is B. Affordability.

Role of a Central Counterparty (CCP):

A CCP acts as a mediator in financial transactions, ensuring stability and reducing counterparty risk.

By becoming the buyer to every seller and the seller to every buyer, the CCP ensures that trades are completed even if one party defaults.

Elimination of Other Options:

A: CCP does not guarantee no default but mitigates its impact.

C: Market making involves liquidity provision, not CCP's role.

D: CCP does not provide funding but manages trade clearing.

References:

ICWIM Module 5: Explanation of trade clearing mechanisms and the CCP’s role.

Understanding Execution-Only Sales:

Execution-only sales occur when the client makes a financial transaction without receiving any advice or recommendations from the intermediary.

The client assumes full responsibility for the decision.

Elimination of Other Options:

A: Charges are typically present in execution-only sales.

C: The product is being sold; the sale cannot occur without it.

D: Guarantees are unrelated to the advisory process.

References:

ICWIM Module 4: Focus on financial advice models, including execution-only services.

In an order-driven market, an electronic order book is used to match buy and sell orders based on strict price and time priority. This system ensures transparency and fair pricing since all orders are visible to market participants.

A whole-of-life unit-linked policy is a permanent life insurance policy where the payout depends on the investment performance of the underlying insurance fund.

How It Works:

Premiums are invested in unit-linked funds chosen by the policyholder.

The policy value fluctuates based on the fund’s performance.

Some policies offer a minimum guaranteed payout, while others fully depend on market returns.

Why is Option A Correct?

The value of the policy directly tracks the investment performance of the insurance fund.

Why Not Other Options?

B (CPI) → Inflation affects purchasing power but does not directly determine returns.

C (Inflation-linked) → Some policies may be inflation-protected, but not all.

D (Interest rates) → Returns depend more on equity or bond fund performance than interest rates.

???? Reference: FCA Handbook (Insurance Conduct of Business), CISI Wealth & Investment Management.

Wholesale Financial Sector Defined

Involves large-scale financial transactions and services for institutions like pension funds, hedge funds, and insurance funds.

Why the Answer is B

Managing portfolios of collective investment schemes and large funds is a hallmark of the wholesale sector, focused on institutional rather than retail clients.

Why Other Options are Incorrect

A. Retail financial sector: Caters to individual clients, not institutional portfolios.

C. Family offices: Focus on managing wealth for high-net-worth families.

D. Private banking: Primarily deals with individual high-net-worth clients.

ICWIM Study Guide, Chapter on Financial Market Segments: Differentiates wholesale and retail sectors.

Investment Management Literature: Describes wholesale services.

References

A custom benchmark is necessary when a portfolio contains multiple asset classes, as no single index can fully represent its performance.

Why is Option D Correct?

A diversified portfolio (e.g., equities, bonds, commodities) needs a composite benchmark that reflects its asset allocation.

Example: A portfolio with 60% equities and 40% bonds might use a benchmark of 60% MSCI World Index and 40% Barclays Global Bond Index.

Why Not Other Options?

A (Easier than a pre-defined benchmark) → Custom benchmarks require more effort, not less.

B (Absolute performance measure) → Benchmarks compare performance relative to the market, not in absolute terms.

C (Tracking error measurement) → A benchmark helps measure tracking error, but the need for a custom benchmark arises due to asset diversity.

???? Reference: CFA Institute (Benchmarking), CISI Wealth & Investment Management.

???? Reference: FCA Handbook (Corporate Actions), CISI Wealth & Investment Management.

Personal Accident Policies:

These policies often include a waiting period before payouts, allowing insurers to verify claims and ensure eligibility.

The waiting period varies depending on the policy terms.

Elimination of Other Options:

A: A doctor's visit is often necessary but not sufficient for payout.

B: Payments are not instantaneous.

D: Documentation is required, but it is part of the claim process, not the trigger for payout.

References:

ICWIM Module 5: Details on insurance policy structures and claims processes.

Personal Accident Policies:

These policies often include a waiting period before payouts, allowing insurers to verify claims and ensure eligibility.

The waiting period varies depending on the policy terms.

Elimination of Other Options:

A: A doctor's visit is often necessary but not sufficient for payout.

B: Payments are not instantaneous.

D: Documentation is required, but it is part of the claim process, not the trigger for payout.

References:

ICWIM Module 5: Details on insurance policy structures and claims processes.