The Referral That Tests Suitability
A long-standing client refers his brother-in-law, Tom, 67, who recently received a $1.4 million lump-sum pension payout. Tom wants to invest it aggressively to 'catch up' because he has only $220,000 in savings and no other income beyond Social Security of $2,900 per month. He needs about $75,000 per year to live on and has a history of two bankruptcies. He asks the advisor to put 85% into growth equities and to 'keep it simple' by not completing a risk questionnaire. The referring client expects the advisor to take care of Tom.
1. What should the advisor do about the request to skip the risk assessment and invest 85% in equities?
Read the worked answer
The advisor should decline to skip the assessment; it is the basis for a suitability determination, not paperwork. Tom's facts point the other way: $1.4M plus $220K is $1.62M, and $75,000/year is about 4.6% of assets before taxes, which is above a sustainable draw for a 67-year-old with no other income. Social Security of $2,900/month covers only $34,800, leaving roughly $40,000 to come from the portfolio, about 2.5%, which is feasible, but an 85% equity allocation with a two-bankruptcy history and a catch-up motive invites a damaging drawdown. The advisor should document the conversation, complete a proper risk and needs analysis, and propose a diversified allocation with a cash and bond reserve sized to fund several years of withdrawals. If Tom insists, the advisor should explain the consequences in writing and consider whether the relationship is appropriate.
2. How should the advisor handle the referring client's expectation and any conflict?
Read the worked answer
The advisor should thank the referring client but make clear that Tom is now the client and that his interests govern. The advisor must not let the referral expectation pressure a recommendation, and should avoid sharing Tom's confidential details with the brother-in-law. If the referring client asks for updates, the advisor should explain the confidentiality boundary. The advisor should also disclose any conflict, such as the fee on a larger or more active portfolio, and confirm that the recommended allocation is not chosen to maximize revenue. Finally, the advisor should set expectations with Tom about the catch-up goal: at 67 with limited savings, the priority is sustainable income and capital preservation, and any growth tilt must be sized so a severe drawdown does not force selling at the bottom.