GUARANTEED INCOME BOND
[This letter is intended to give a basic outline only and will not cover every relevant
feature of the product. You will need to customise and expand it to include product
features and information relevant to circumstances]
Dear [Salutation]
Further to our meeting of [DATE], I am now writing to confirm the outcome of our
discussions.
You will recall I provided you with a copy of my [list documents issued e.g. Terms of
Business Letter] on [DATE] and that you have placed no restrictions on the type of
products or markets where you require advice. I confirm that I am authorised to advise
on the areas covered within this letter.
Optional - where a client has refused to provide all information:
You did not wish to disclose all details relating to your circumstances. This was
because [INSERT REASON]. I have proceeded on the basis of the information
provided. We agreed that this was acceptable given that [INSERT REASON FOR
PROCEEDING WITHOUT INFORMATION]. However, you should be aware that my
recommendations may have differed if I had been aware of all your personal and
financial circumstances.
Optional – where a client has asked to restrict advice to a particular area:
You instructed me to specifically limit my advice to [INSERT AREAS] and I have acted
accordingly. I have, therefore, only obtained the necessary information from you to
advise on the above area. You should be aware that my recommendations may have
differed if I had undertaken a full review of your financial circumstances.
Background
You are currently [insert any relevant background information on client e.g. age,
marital status, financial situation, specifically including any relevant financial
services experience or qualifications].
We discussed your understanding of financial services products, with reference to
previous experience of advice received and products purchased, and established that
you have [no knowledge of investments whatsoever, as this is your first
investment/ have a reasonable knowledge of investments, as you already have an
investment or pension contract/ have a strong knowledge of investments, with a
range of investment or pension contracts, and take an active interest in following
investment markets and reviewing your financial plans.]
We discussed market fluctuations, and how these might generate growth or income
within your investments, and also how exposure to risk means that you can lose all or
part of your investment. You [have/have not] been comfortable with fluctuations in the
value of your investments in the past.
Your financial goals, needs and priorities
During our meeting we discussed various aspects of your personal and financial
situation, and we agreed that at the present time, your main needs and priorities are:
Financial Goal Priority Starts Finishes Value (per
annum)
*Include where not all of clients needs met
Whilst we would like to address all of your financial needs over time, at this stage it was
necessary to prioritise which of your needs we should address immediately. We
discussed which needs were most important to you, and considered the amount of
income and/or capital required to meet these objectives. For this reason we decided
that (insert objective/s not addressed) would be reviewed at a later date because
(insert reason and intended review date(s)).
Objectives
During our meeting we discussed various aspects of your personal and financial
situation.
At the present time, your prime objective is to invest a cash sum to provide you
with a specific level of income over a fixed term of (X) years. You also require the
income to be paid on a monthly/quarterly/annual basis.
Attitude to Risk
I explained how, when making financial provision to fulfil this/these objective(s), the
degree of risk you are prepared to accept for each one would be a major factor in
considering the most appropriate choice of product.
We established that your attitude to risk could realistically be described as
[Defensive/Cautious/Balanced/Moderately Adventurous/Adventurous].
Insert appropriate definition
A Defensive Investor is looking for an investment where the value of their capital should
not fall in the short term and aims to produce returns that are comparable with those
from a high street deposit account, but have the potential for some long term growth.
They would feel very uncomfortable if their investment rose and fell in value very
quickly.
A Cautious Investor is looking for an investment which, while giving some potential for
real returns, aims to produce returns that are at least as good as those from a high
street deposit account. A high level of security of their capital is a priority. Whilst
recognising that investment values will change, they would feel uncomfortable if their
investments rose and fell in value very rapidly.
A Balanced Investor is looking for a balance of risk and reward, and whilst seeking
higher returns than might be obtained from a deposit account, recognises that this
brings with it a higher level of risk and that the value of their investment may fluctuate in
the short term. They would feel uncomfortable if the overall value of their investments
were to fall significantly over a short period and would not be happy to see their capital
eroded.
A Moderately Adventurous Investor is generally market aware and understands and is
willing to accept a higher level of risk in return for the potential for higher returns in the
longer term. They recognise that this may result in the value of their portfolio fluctuating,
possibly significantly, in the short term.
An Adventurous Investor is willing to accept a much higher level of risk in return for the
potential for higher returns in the longer term. They recognise that this may result in the
value of their portfolio fluctuating, possibly significantly, in the short term. They are
aware that the risks are such that a significant percentage of the capital sum could be
lost.
Recommendation
We discussed the various ways you could achieve your present objective(s) as
outlined above. I recommend that you consider investing in a Guaranteed Income
Bond offered by (Provider). This product will guarantee you an income of X% per
annum / X% over a term of X years. Income will be paid on a monthly/quarterly/six
monthly/annual basis.
It is worthwhile outlining the product features of the contract recommended to
demonstrate why it is suitable to your current circumstances and stated objectives,
which I outlined earlier.
Guaranteed Income Bonds are simple contracts guaranteeing a fixed regular income
payment for the duration of the bond's term. Income is treated as having been paid net
of basic rate tax, though non-taxpayers are unable to reclaim the tax deducted at
source.
Up to 5% of the initial investment can be taken each year from plans such as this
without immediate liability to Income Tax but higher and additional rate taxpayers will
pay tax on any income in excess of this 5% (as will basic rate taxpayers if the top-sliced
excess takes their income over the higher rate threshold). Payments exceeding the 5%
allowance are counted as an addition to income and may result in a reduction in age
allowance for those entitled to it. The original amount invested is returned at maturity
and again, higher and additional rate taxpayers (or basic rate taxpayers whose income
is taken over the higher rate threshold by the addition of the top-sliced gain) may have
a tax liability on final repayment since ‘income’ payments within the 5% limit would be
added to the capital return to calculate the actual profit made (the final sweeping-up
calculation is '(final encashment value + all previous withdrawals) less (original
investment amount + total chargeable excesses)' which, as in this case the final
encashment value and the original investment amount are identical, means the
calculation amounts to total withdrawals less chargeable excesses = the 5% amounts
taken).
Turning then to my specific recommendation:
Term
In discussing your objectives it was appropriate to consider a contract with a
term of (X) years. We agreed that you would not foreseeably wish to access the
invested funds within this timescale. Details of the likely surrender values are
outlined within the accompanying Provider Literature. As you will see, they make
encashment prior to maturity particularly unattractive.
Level of investment
Having considered both your income and expenditure we agreed that your
investment of (£) was affordable for you. This was selected on the basis that it
was the maximum investment that you wished to commit for the term agreed.
You have sufficient surplus income or capital in the event of any short term
requirements and confirmed that this expenditure will remain affordable to you in future.
Provider
In reviewing your objectives we considered a number of criteria which we agreed
were important to you, including (insert details).
Having undertaken appropriate research on your behalf I believe that (XYZ Life)
will offer the most suitable contract given your stated objectives and risk profile.
(Detail justification in sufficient depth in terms of specific product features,
financial strength, contract charges, past performance etc OR REFER TO
ATTACHED RESEARCH BELOW)
Optional - what research is attached?
A copy of the research undertaken accompanies this letter for your consideration
which outlines in greater detail the reasons for recommendation of the chosen
provider.
Optional - if any contracts replaced
Replacement Contracts
In reviewing your objectives, I have recommended that you surrender/discontinue the
contracts outlined in the Replacement Contract Form. [Insert any additional
instructions e.g. do not cancel until new policy in force and that they are
responsible for ensuring that payments to the existing contract are discontinued
when appropriate]
The rationale for this is also outlined in the Replacement Contract Form, which we
completed during our last meeting and a copy of which is attached to this letter.
Key Features Document
I have provided you with a Key Features Document and illustration. This documentation
is important and contains information regarding the product which I have
recommended, particularly with regards to the product’s aims, charges, the commitment
which it entails, together with its legal (including policyholder protection) and tax status.
If there are any points on which you are unsure or require further clarification, please
contact me and I will be pleased to explain these in greater detail.
Financial Services Compensation Scheme (‘FSCS’)
The FSCS was set up under the Financial Services and Markets Act 2000 and exists to
protect clients of FSA authorised firms and covers deposits, insurance and investments.
The Scheme can pay compensation to clients who have lost money as a result of their
dealings with FSA authorised firms that are unable to pay claims against them, usually
because they are insolvent or have stopped trading.
As outlined earlier, the limit of protection varies between different types of products and
is detailed in our (Keyfacts about our services and costs document) (insert name
of other document where you detail the FSCS coverage).
For pensions, life assurance and non-compulsory insurance (e.g. home and general),
the compensation level is 90% of the claim.
(Adviser Note: the following paragraph should be used where external funds are
selected)
You are aware that where you are investing in [PROVIDER] investment that itself
purchases external investments, should one of the external investments fail to meet
their liabilities, then [PROVIDER] may make a claim on behalf of all policy holders, the
extent of [PROVIDER]’s claim is limited. However, as [PROVIDER] itself is not in
default, you will not be in a position to claim via the Scheme. An example is individual
bank cash deposit fund held within an investment vehicle such as an Investment
Bond. You should note in this instance that the institution providing the investment
vehicle is deemed to be an institutional investor and may only be able to raise one
claim within the agreed limits, on behalf of all policyholders. In other words, as a
policyholder you could not raise a claim on an individual basis.
Risks
The Key Features Document also provides you with details of any risks and potential
disadvantages associated with the contract recommended. We have previously
discussed these, and I would like to highlight the following points:
You will receive less than your original investment if you surrender the Bond
prior to its maturity date.
No immediate liability to Income Tax arises on the first 5% of each year’s
income but higher rate taxpayers (and basic rate taxpayers whose income
exceeds the higher rate threshold after addition of the bond ‘income’) will pay
tax on some or all of the income in excess of 5%.
Payments exceeding the 5% allowance are counted as an addition to income
and may result in a reduction in age allowance for those entitled to it.
The original amount invested is normally returned at maturity and again,
higher rate taxpayers and those whose income is taken over the higher rate
threshold by the addition of the top-sliced gain may have a tax liability on final
repayment.
The advice provided to you is based upon the information you have disclosed and
therefore, if this letter does not accord with your view of the situation or you require any
further clarification please contact me immediately.
All statements concerning the tax treatment of products and their benefits are based on
our understanding of current tax law and HM Revenue and Customs’ practice. Levels
and bases of tax relief are subject to change.
Reviewing your financial arrangements in the future
We discussed the importance of regularly reviewing your financial arrangements and
[insert details on whether the client will receive pro-active review].
If will is in place
I note that you currently have a will in place. I recommend that this is also kept under
review and updated in line with your changing financial situation.
If no will is in place
I note that you do not currently have a will in place. I recommend that this is drafted as
soon as possible and reviewed and updated in line with your changing financial
situation.
Remuneration (to be tailored to the firm’s specific circumstances)
During our meeting I explained the [two] methods of how we charge for our advice,
namely remuneration by way of commission from the recommended product provider or
by way of a fee. These are detailed in our [keyfacts about our services and costs
disclosure document] which we gave to you at the meeting. Following this you decided
to opt for remunerating us by way of [commission/fee]
Commission
[As agreed, [firm name] will receive X% initial commission and X% annual fund based
commission based on the value of your investments. Based on an investment and or /
transfer of £xxx, [firm name] will receive £xxx initial commission and £xxx annual fund
based commission]
Or
Fee
[As detailed in our fee agreement signed an initial fee of £xxx will be
charged to meet the costs of our recommendation and implementation of these
recommendations and X% annual fund based commission which currently equates to
£xxx annual fund based commission
The commission due from the provider has been [offset against our fee] / [refunded to
you] / [used to reduce the charges on your contract] / [used to enhance the investment
value of your contract].]
Cancellation rights
Details of the appropriate cancellation period for the contract recommended are
contained within the illustration which was provided to you.
[Adviser Note: in most instances a Client will not be able to exercise a right to
cancel in connection with the purchase of shares, units in a collective investment
scheme and unit linked life/pension policies when sold at a distance – if so this
needs to be confirmed within the Suitability Letter.]
Conclusion
I trust that this letter, together with accompanying documents, will clarify why I believe
the contract(s) recommended is/are the most suitable for your financial objectives.
Should you require further information regarding the contract(s) recommended please
do not hesitate to contact me.
Yours sincerely,