The six-year protected growth plan and a client who defers entirely
Mr and Mrs K are 71 and 69. Their £380,000 portfolio is held as £150,000 in a short-dated gilt fund, £120,000 in a global equity fund and £110,000 in a cash ISA. They spend £35,000 a year; state pensions provide £21,000, so £14,000 a year is drawn from the portfolio and is currently met from gilt income and cash. Their adviser proposes switching the whole £120,000 equity holding into a six-year 'Protected Growth Plan'. The plan pays 6.5% a year provided a major index never falls more than 35% from its starting level; if it does, capital is reduced one-for-one with the fall. There is no secondary market, the issuer is a mid-tier bank, and the initial charge is 3%. Mr K says: "I don't really understand it, but my friend has one and I'll do whatever you recommend."
1. Identify the suitability and conduct issues the adviser must resolve before this switch could be recommended, and say what the analysis should show.
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Start with the numbers, not the product. The £14,000 draw is 3.7% of £380,000 and is currently funded from capital-stable assets. The switch replaces a liquid, capital-stable holding with a six-year, market-exposed one.
Issues to resolve:
- Conditional income. 6.5% on £120,000 is £7,800 a year, but it is contingent. The income the clients actually rely on cannot be assumed.
- Tail risk mispriced as 'protection'. A 35% barrier is not remote over six years. A breach means a one-for-one fall: a 50% index fall gives roughly a 50% capital loss, i.e. £60,000 - over four years of their total draw. The payoff is economically a sold put.
- Liquidity and term. Six years, no secondary market, early exit at the issuer's discretion. The clients are 71 and 69; six years is a long lock-up for money that funds spending.
- Issuer and concentration risk. £120,000 with one mid-tier bank is 32% of the portfolio. Market loss is not covered by any compensation scheme; only issuer default may be, and only within limits.
- Cost. 3% is £3,600 up front plus embedded hedging costs, against a short-dated gilt fund costing a fraction of that. The adviser must show the switch is worth that.
- Vulnerability and deference. 'I'll do whatever you recommend' is a flag. Both clients should be engaged, understanding evidenced, and a third party or specialist considered.
- Remuneration conflict. If the adviser is paid from the product, that must be disclosed and the recommendation justified against cheaper alternatives on the merits.
What the analysis should show: post-switch portfolio risk, liquidity and income under a stress scenario where the index falls 40%; a comparison with simply holding the gilt fund; and a documented capacity-for-loss conclusion.
2. Mr K insists on proceeding anyway. How should the firm handle this, and what must the file contain?
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An instruction to proceed does not remove the suitability obligation - 'insistent client' status allows the firm to act provided the transaction is not unsuitable, it does not convert an unsuitable sale into a suitable one.
Before dealing:
- Confirm both clients' consent if the holding is joint; a deferential sole instruction is weak evidence.
- Re-run the assessment against the stress scenario. If a 40% index fall would breach the barrier and leave the spending plan short, decline and document the refusal.
- If it remains defensible: provide the key information document, a scenario table showing barrier breach outcomes (not just the headline 6.5%), and confirm cancellation rights.
- Confirm and record that the client understands the capital-at-risk condition, the lock-up and the issuer exposure.
File evidence: the advice given, the client's specific reasons for proceeding, confirmation that advice was not followed, the client's own words, the date and attendees, and senior sign-off against the firm's insistent-client policy.
Do not use this route to paper over a failed suitability assessment - that is the failure mode regulators test for.
3. Would your analysis change if the £120,000 came from the cash ISA rather than the equity fund?
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Yes - the source of funds changes the diagnosis, though not the conclusion.
- Drawn from cash: the clients lose their instant-access reserve and the tax wrapper's flexibility at the same time. The first question becomes whether £110,000 of cash was genuinely surplus or was the emergency buffer. Removing liquidity from a 71- and 69-year-old to lock it for six years is a stronger objection than swapping one growth asset for another.
- Drawn from equities: the portfolio risk may fall or rise depending on the barrier, but the clients still hold the cash reserve, so the liquidity objection is weaker. The concentration objection is stronger.
What does not change: issuer concentration, the 3% charge, the conditional income and the barrier risk. The correct frame is the post-switch portfolio as a whole - liquidity, income certainty and worst-case capital - not the source line.