Suitability Under Pressure
A 34-year-old client, Raj, earns £95,000, has £12,000 in savings, a £240,000 mortgage, and no dependants. He wants to invest £40,000 inherited from a grandparent into a single thematic technology fund with a 0.9% fee and high volatility. He states a 3-year horizon because he plans to buy a house. His risk questionnaire scores him as balanced (4/7), but he insists he is 'comfortable with risk' and has read about the fund online. The adviser's firm restricts single-fund concentration to 25% of investable assets. Raj has no emergency fund beyond the £12,000 and no protection cover.
1. Identify the suitability conflicts and explain how the adviser should resolve them.
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Three conflicts: (1) Horizon mismatch - a 3-year need against a highly volatile single-sector fund means a market drawdown could hit exactly when funds are needed; equities are generally unsuitable for short horizons. (2) Concentration - £40,000 in one fund breaches the firm's 25% limit if his investable assets are around £52,000, and single-fund exposure adds idiosyncratic risk. (3) Stated risk appetite versus capacity for loss - his questionnaire score of 4/7 does not support a high-volatility thematic fund. The adviser must prioritise capacity for loss over stated appetite, explain the mismatch in writing, and either recommend a diversified solution with a cash/short-dated component for the house deposit or decline to proceed. Record the rationale.
2. Draft the key points the adviser should cover in the suitability discussion and the documentation required.
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Cover: the purpose of the money and the 3-year deadline; the difference between willingness and ability to take risk; the effect of a 30-40% drawdown on a £40,000 pot; fees (0.9% plus platform and advice costs) and their compounding drag; the absence of an emergency fund and protection cover; and the firm's concentration rule. Offer alternatives: keep the house deposit in cash or short-dated gilts, invest a smaller diversified amount, and build an emergency fund. Document the client's objectives, risk profile, the mismatch, the alternatives offered, and his informed decision, including a signed acknowledgement if he proceeds against advice. Retain records per conduct rules.