Concentrated Holding and a Leveraged Note
A 58-year-old client has £1.4 million of investable assets: £600,000 in shares of the listed company where she works, £500,000 in cash and ISAs, and £300,000 in a global equity fund. She has a £150,000 repayment mortgage and wants to retire at 62 on about £45,000 a year. Her income is variable because she is a self-employed consultant, and she has no separate emergency fund. Her risk questionnaire score is at the top of the 'adventurous' band, and she says she could accept a 20% temporary drawdown. An adviser recommends putting £300,000 into a three-year autocallable note with three-times leverage, a 15% capital-protection barrier, and a 2% annual fee. The note is issued by the adviser's parent bank. The client has signed the risk questionnaire and wants to proceed.
1. Identify the main suitability concerns in the recommendation.
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The central problem is confusion between risk tolerance and capacity for loss. A high questionnaire score shows willingness to take risk, not the ability to absorb losses. The client is four years from retirement, has variable income, no emergency fund, and a £150,000 mortgage. A 20% drawdown on the whole portfolio would be £280,000, but the recommended note adds leverage and a barrier, so the possible loss is harder to understand and may be greater than the questionnaire implies.
Concentration is severe: £600,000, or about 43% of investable assets, is in one listed employer, which also exposes her salary and human capital to the same company. Adding a £300,000 leveraged note issued by the adviser's parent bank increases both concentration and conflict-of-interest risk. The 2% annual fee and autocallable structure are complex; the client may not understand the barrier, the leverage, or the issuer credit risk. The 12% return target implied by the plan is unrealistic for a low-risk retirement portfolio and may be driving the product recommendation rather than the client's needs.
2. What additional information should be obtained before any recommendation is finalised?
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Obtain a full cash-flow plan: essential versus discretionary spending, pension entitlements, expected retirement income, mortgage repayment date, and the size of an adequate emergency reserve. Establish capacity for loss formally, including how a 20–30% fall would affect the retirement date and spending. Review the employer shares: any lock-up, dealing restrictions, tax position, and the client's remaining human-capital exposure. Check investment knowledge and experience of leveraged or structured products, and confirm whether she understands the barrier and issuer risk. Ask about health, dependants, and any guaranteed income. Document the conflict of interest with the parent bank and whether the client has been told about it. Finally, test whether the 12% target is a need or a hope; if it is a need, the plan requires either more saving, later retirement, or lower spending, not necessarily more risk.
3. Recommend an alternative approach and explain how you would document it.
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Do not recommend the leveraged note. Start with a realistic plan: build an emergency fund of at least 12–24 months' essential spending, repay or plan for the mortgage, and establish the retirement income gap. Reduce the employer-share concentration in stages, using tax wrappers and dealing windows where available, and reinvest into a diversified multi-asset portfolio. Hold a cash/near-cash bucket for near-term spending and a growth portfolio for the longer term. The expected return should be set from the asset allocation, not from a 12% target.
Document the risk tolerance score, the capacity-for-loss assessment, the concentration analysis, the conflict-of-interest disclosure, and the reasons for rejecting the note. Record the client's objectives and any trade-offs she accepts, such as later retirement or lower spending. If she still wants a structured product, require an independent suitability check and a clear explanation of fees, barrier, leverage, and issuer credit risk. Suitability is judged on the client's circumstances, not on a signed questionnaire.