Answering ‘Factors’ Questions on the CII R06 Exam

After many years of writing case study analyses in preparation for the R06 exam and discussing with our customers afterwards how they felt they did, we know that most candidates struggle with exam technique. This is the overwhelming feedback we get from those who found the exam difficult and even those who thought they did well but didn’t get the pass they were hoping for.

R06 is a very different beast from the other R0 exams; it’s not just about studying technical knowledge, it’s also about understanding the questions being asked and what is required from your answers, and this does mean a different type of exam preparation is needed.

In this article, we aim to give you some in-depth guidance on how to prepare for some of the ‘factors’ questions often seen in R06. Understanding these questions and answering them well is likely to pick up a good chunk of marks.

Attitude to Risk/Capacity for Loss

Let’s start by taking a look at some ‘factors’ questions that have reared their head a few times over the years relating to attitude to risk and capacity for loss. The latest was in the February 2021 exam. Question 2 part b of Case Study 2 asked: 

Identify the factors that would typically influence Dylan and Susan’s capacity for loss. 10 marks 

(the full exam guide with the case study is available here)

We would advise for ‘factors’ questions working your way through the case study and writing down anything you think is relevant, so in this case, anything that affects their ability to absorb financial loss. Then see if you can think of any generic factors that would also have an impact.

Here are the model answers and our comments:

Age – just a case here of stating the obvious but don’t forget to write it down!

Timescale/intended retirement age – Timescale is a generic answer for this question that would likely apply to all cases studies, but the CII here would also be looking for anything client specific so the model answer includes intended retirement age as Dylan and Susan were both aged 59 so if they want to retire imminently or plan to work on for more years that is going to have a massive impact on their financial position. If we had been told when the clients want to retire, you would want to build this into the answer too.

State of Health – another obvious answer. You could have also said they are both in good health. If a case study included a client who had a short life expectancy you would also want to add this in.

Objectives – their objectives for the years up to retirement and when they retire i.e., do they downsize, gift money to children etc are all important factors to consider. We aren’t given much information in the case study here so ‘objectives’ on its own is sufficient as an answer, but if the client said they wanted to buy a boat in retirement or go on endless holidays, add this detail into your answer.

Income/expenditure/budget – income and expenditure are obvious answers for influencing capacity for loss

Assets/liabilities/expected inheritance/any protection policies – they have grouped a few things together here in the model answer but these are all important aspects of their current wealth and potential wealth in the event of death or ill health. You can add in client specifics if you feel they are relevant to the case study e.g. if you were told the client had an outstanding mortgage or a car loan.

Large emergency fund/willing to downsize – having a good size emergency fund increases the clients capacity for loss as does being able and willing to take assets from their property which is mortgage free.

Investment experience/knowledge – again a generic answer that is likely to apply to most case studies. Their investment experience will likely impact their choices, objectives and attitude to risk. It’s worth noting here that this is a valid answer for this question as this question says identify factors that would ‘typically influence’ capacity for loss rather than identify factors ‘from the case study’. If the question had been asking specifically about information in the case study, this would not be a relevant answer as we are not told what experience or knowledge they have.

Economic environment/market conditions – again a generic answer influencing capacity for loss.

State pension entitlement – we do not know the level of their State pensions, but it is still an important factor. Here, the clients are due to retire in a few years’ time so guaranteed income from their State pensions will have a significant impact on their capacity for loss.

Take a minute to reflect on these model answers – most of them are in fact just common sense rather than technical in nature. The examiner’s comments for this question said a lot of candidates had missed points by not taking into account State benefits, the clients existing assets or their emergency fund.

In our analysis for this case study, we had asked which factors influence Susan and Dylan’s attitude to risk rather than capacity for loss.  The answers are very similar, as factors influencing a client’s attitude to risk are in all likelihood going to influence their capacity for loss too. The attitude to risk/tolerance for risk question has popped up a few times in R06 in October 2013, July 2017 and January 2019. In January 2019, the following question appeared (exam guide available here):

Identify the factors that would typically influence Mario and Dianne’s tolerance for risk. 7 marks

Here the model answer was:

• Timescale
• Age/health
• They have disposable income/adequate emergency fund/level of wealth or assets
• Guaranteed pension income for Dianne/State pension entitlement
• Investment experience/knowledge
• Objectives
• Economic environment/current market conditions
• Tolerance for loss/capacity for loss

Again, as with Dylan and Susan, this was a couple approaching retirement, the only real difference here is in this case study Dianne had a guaranteed pension income from her employer so the model answer builds this in with the State pension answer. We believe you could also have added in here liabilities/outstanding mortgage.

If you are thinking there are 7 marks for this answer but 10 marks in 2021 for pretty much the same answer you’d be right! We don’t quite see the logic here either so our advice, as always, is write down as many points as you can!

Product-Specific Factor Questions

Some ‘factors’ questions are more product-specific, so for these, you will need some technical knowledge of the topic. In April 2018 there were two such questions:

Case Study 1 Question d (ii)

State the factors an adviser should consider in identifying a suitable sum assured for a policy that provides a lump sum in the event of death or serious illness of John (the main breadwinner).

Here, we are looking at client-specific factors from the case study that influence how much sum assured would be needed, and we also need to think about what would be practically needed if John were to die or have a serious incapacity.

Model answer:

Cost of Lucy’s school fees – a known potential liability

Level of outstanding debt – we would suggest you add in here current liabilities/outstanding mortgage

Cost of living for family/expenditure – this would apply to all clients when assessing the level of sum assured

Cost of adapting home in event of critical illness – a generic answer for critical illness

Cost of potential care needs in event of critical illness/child care costs/availability of State benefits – care needs is another generic answer relating to critical illness

Kate/John’s income – as this is not related to an income protection policy you may be tempted to leave this out but if John were to stop working, his income would stop and only Kate’s would remain so both are factors influencing the sum assured required.

We could also add to the model answer – existing cover and existing assets/gift from John’s parents

Another ‘factors’ question from the April 2018 exam was:

Case study 2 Question b (i)

List the factors Sally should be aware of if she decides to use flexi-access drawdown to take her pension income in retirement.

As we have a client here close to retirement with a defined contribution pension fund, it is likely that a decumulation question will come up, so some technical revision on the options/death benefits would be highly advisable.

In this specific question, you need to write down all you know about the pros and cons of drawdown as opposed to other options. Here is the model answer, most of which is self-explanatory:

• Higher risk than annuity/funds can match ATR/investment risk
• Fund remains in a tax wrapper
• Income flexible
• Can use TFC/ tax-efficient income
• Complex/reviews
• Charges/advice costs
• Income triggers MPAA/ MPAA not triggered on PCLS
• Potential for growth
• Funds may deplete/no guaranteed income/longevity risk
• No tax on death before 75/ can pass to family/IHT free on death/ improved death benefit

What’s interesting from the examiner’s comment on this paper was that the second ‘factors’ question on decumulation, which is more technical in nature, was answered far better than the first where the examiner noted that candidates did not answer the question actually being asked, yet when you see the model answers, most are common sense.

In summary, we hope this gives you a broader understanding of these types of questions. We would suggest you also look at past CII exam guides and our past analyses for more exam technique practice.

Grab the resources you need!

We consider our R06 case study analysis a must-have resource for this exam. Our team have over 10 years’ experience working on the case studies for each exam sitting and we continue to accurately predict the majority of questions that are asked.

We consider the types of questions (and answers) we think will be tested based on the case studies plus providing generic R06 questions and answers as well as help on exam technique. The analysis now also includes self-test questions so you can practise exam technique and test your technical knowledge relevant to the case study subject matter.

You will also have an opportunity to ask questions of our lead analysis author on our email support day which is available one working day before the exam. Full details of our analysis are available here, or you can download the taster analysis to see for yourself what is included.

Information in this article is correct as at 2 September 2021.