Care-Home Deposit and a Concentrated High-Yield Recommendation
A 78-year-old client has a £300,000 portfolio and receives a £22,000 annual pension. She needs £120,000 in two years for a care-home deposit and has no long-term care insurance. Her completed risk questionnaire scores 'medium', but during the meeting she says she cannot afford to lose more than £20,000 and does not understand bond duration. An adviser recommends moving £210,000-70% of the portfolio-into a single emerging-market local-currency bond fund yielding 8.5%, with a 0.9% annual charge and a three-year minimum holding period. The fund's factsheet shows a 12% drawdown in the prior year. The client says she wants 'the highest income' and asks to sign today. The firm's suitability process requires capacity-for-loss assessment, concentration review, and a two-meeting rule for clients over 75 unless waived with documented rationale.
1. Assess the recommendation against the client's objectives, capacity for loss, and liquidity needs. Would you approve it?
Read the worked answer
I would not approve it as presented. The client needs £120,000 in two years, which is 40% of the portfolio, but the recommendation places £210,000 into a fund with a three-year minimum holding period and a 12% prior-year drawdown. A 12% fall on £210,000 would be about £25,200, already above the client's stated maximum tolerable loss of £20,000. The recommendation is also highly concentrated in one fund, one region, and local-currency bonds, adding currency, duration, credit, and liquidity risk. The 'medium' questionnaire score does not override the client's explicit loss limit and limited understanding of duration. Income need does not justify risking the care-home deposit. A suitable solution should keep the £120,000 in low-volatility, liquid assets maturing before the care-home date and invest the remainder in a diversified portfolio consistent with the client's actual capacity for loss. The reasoning is that suitability requires matching objectives and capacity for loss, not simply following the highest-yield request.
2. The client insists on signing today and says she accepts the risk. What should the adviser do, and what must be documented?
Read the worked answer
Client insistence does not cure unsuitable advice. The adviser should decline to recommend the product and explain, in plain language, the liquidity mismatch and the potential loss compared with the £20,000 limit. If the firm permits an unsolicited execution-only instruction, it should be clearly labelled as unsolicited, should not be presented as an adviser recommendation, and should still satisfy fair-treatment and appropriateness checks for a complex product. The two-meeting rule for clients over 75 should be applied unless a documented rationale supports a waiver. The adviser should record the client's objectives, the £120,000 two-year need, the stated loss limit, the duration explanation, the alternative offered, the specific warning given, and the client's instructions. Escalation to a supervisor is prudent before accepting any waiver. The reasoning is that documentation shows the firm identified the mismatch; it does not convert an unsuitable recommendation into a suitable one.
3. What alternative structure would better meet the stated income and care-home deposit needs?
Read the worked answer
A better structure separates the care-home deposit from the long-term investment. Roughly £120,000 should be held in cash-like or short-dated high-quality instruments maturing before the two-year need, with attention to deposit protection limits and liquidity. The remaining £180,000 can be diversified across asset classes and currencies appropriate to the client's capacity for loss, with income generated from a blend of short-duration bonds, quality dividends, and cash rather than a single 8.5% emerging-market fund. The adviser should show the client the trade-off: higher yield usually brings higher volatility and lock-up risk. Charges should be transparent, and the portfolio should be reviewed if care needs change. The reasoning is that matching assets to liabilities is more important than maximising headline yield when a large known payment is due soon.