Commission, Capacity, and the Suitability Report
You are a newly certified EFP at a six-adviser independent firm. A senior colleague asks you to co-sign a suitability report for Mrs K, a 58-year-old widow. Her investable assets are €420,000, mainly from an insurance payout. The report recommends a 'balanced' portfolio of a provider's guaranteed-income product and records her risk tolerance as balanced. The product pays your firm a 2.5% trail commission that is not mentioned in the report. In your first meeting Mrs K says she cannot afford to lose capital because she expects to need €80,000 in 18 months for her daughter's house deposit. She also says the colleague told her the product was 'as safe as a bank account'. Your firm's compliance manual requires written disclosure of all commissions, a 24-hour cooling-off period before signature, and a documented capacity assessment. The colleague says the 2.5% is 'standard market practice' and that disclosure will confuse her. He is due to go on leave and wants your signature today.
1. What should you do before signing, and what ethical principles are engaged?
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Do not sign today. Signing would misrepresent Mrs K's risk profile and conceal a conflict of interest. The ethical principles engaged are integrity, objectivity, client's best interest, professional competence, and confidentiality. Concretely:
- Decline to co-sign and explain to the colleague why the report is inaccurate.
- Meet Mrs K alone to check her capacity, her actual risk tolerance, and her liquidity need.
- Redo a documented capacity-for-loss assessment. The €80,000 need in 18 months is a hard constraint: that money should not be exposed to market or product lock-in risk.
- Disclose the 2.5% trail commission in writing and in cash terms. On €420,000, 2.5% is about €10,500 a year, paid from the product rather than separately by the client. That creates a clear conflict.
- Escalate to compliance because the report is inaccurate, the cooling-off period has not been observed, and the client appears to have been told the product is 'as safe as a bank account'.
- Record the facts and advice given.
The fact that 2.5% is 'market practice' does not make non-disclosure ethical. If the colleague continues to pressure you, use the firm's whistleblowing route.
2. Draft the key disclosure you would give Mrs K in plain language, and explain how you would test her understanding.
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Suggested disclosure: 'The product pays my firm 2.5% per year of the amount invested. On €420,000 that is about €10,500 a year. It is paid from the product, not by you separately, but it means my firm earns more if you invest more. This is a conflict of interest. You can ask for a full breakdown. You do not have to decide today: you have at least 24 hours to think about it. The product is not the same as a bank account, and you may not be able to access the €80,000 you need in 18 months without cost or loss.'
Test understanding with teach-back, not a signature. Ask her to explain in her own words: what she pays, who pays it, what she might lose, when she needs the money, and what happens if she changes her mind. If she cannot explain the commission and the liquidity constraint, do not proceed. Document her responses.
3. How should the recommendation be reconstructed if she needs €80,000 in 18 months?
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Split the assets by time horizon. Ring-fence €80,000 in cash or short-dated deposits maturing before the house deposit is needed; do not put it in a guaranteed-income product with exit penalties, surrender periods, or market exposure. For the remaining €340,000, assess her real capacity for loss, income needs, inflation, and tax position. A 'balanced' label is not enough: document the maximum temporary fall she could tolerate without abandoning the plan. If she cannot tolerate loss on the €340,000 either, the answer may be more cash and short-duration bonds, not a commission-paying product. Revisit the provider's product terms: guaranteed income products often have lock-ins and early redemption charges that are unsuitable for a client with a near-term liquidity need. Record the trade-off between lower expected return and safety.