The Concentration Limit That Wasn't Checked
A retail client, Ms. Okafor, holds a portfolio of £180,000 in UK-listed equities. Her adviser, employed by a small wealth firm, recommends selling £40,000 of holdings to buy a single small-cap stock. The firm's internal suitability policy caps any single position at 25% of portfolio value and requires a documented risk-tolerance assessment before recommending concentrated positions. The adviser's file shows a completed risk assessment from 14 months ago rating the client as 'balanced', and no update since. The client's stated objective in that assessment was 'steady income with capital preservation'. The recommended stock pays no dividend and has a market capitalisation of £120 million with average daily volume of £90,000. The adviser argues the client verbally confirmed she wanted higher growth in a phone call, but no call note exists. The trade is executed the next day.
1. Identify the conduct and suitability failures in this scenario and explain what the firm should have done differently before execution.
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The most serious failure is an unsuitable recommendation against the client's documented objective of income and capital preservation. A non-dividend-paying micro-cap does not serve that objective, and a 14-month-old assessment is stale for a recommendation that materially changes the portfolio's risk profile.
The second failure is the concentration breach. £40,000 on a £180,000 portfolio is roughly 22% in a single illiquid name, and once combined with any existing exposure it likely breaches the firm's own 25% cap. Internal policy limits are not optional; breaching them is a supervisory and conduct issue even if the client agrees.
The third failure is evidencing. A verbal instruction to pursue higher growth must be recorded contemporaneously, with the client's acknowledgement of the changed objective and the concentration risk. An undocumented call is not adequate evidence.
Before execution the firm should have: refreshed the risk-tolerance and objectives assessment; documented the change in objective in writing and obtained client sign-off; assessed liquidity against the position size (a £40,000 order against £90,000 average daily volume is a large fraction of a day's trading and would move the price); considered whether the concentration is appropriate at all; and recorded a suitability report explaining why the recommendation is suitable despite the policy cap.
2. The client later complains she was not told the stock was illiquid. The adviser says liquidity was 'obvious from the fact it was a small company'. Assess the firm's complaint-handling position.
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The firm's position is weak. Disclosure obligations require that material risks be communicated clearly, not left to the client to infer from the issuer's size. Illiquidity is a material risk for a retail client with a £40,000 position against £90,000 average daily volume: exiting the position could take many days and materially move the price against her.
The firm should assess the complaint on the substance, not the adviser's characterization. Key questions: was the liquidity risk explained in a way the client could understand? Is there any record of the explanation? Did the suitability report address exit risk? On the facts, the answer to all three is likely no.
A defensible response is to uphold the complaint in part, remediate any loss attributable to the failure to disclose, and treat the missing call note and stale assessment as separate reportable control weaknesses. Arguing that the risk was 'obvious' is unlikely to satisfy a regulator or an ombudsman, because the test is whether the specific client was adequately informed, not whether a professional would have inferred the risk.