A questionnaire score of 78 and a client who cannot sleep
Alan is 61 and plans to stop work at 65. He holds HK$7.8 million across a 78/22 equity/bond portfolio, plus an outstanding mortgage of HK$1.9 million (monthly payment HK$19,800, nine years remaining). At 65 he expects a final-salary pension lump sum of HK$2.5 million, and pension income plus an MPF annuity of HK$17,000 a month thereafter. He says he needs HK$40,000 a month after tax in retirement to maintain his lifestyle. On the platform's risk questionnaire last month he scored 78/100, labelled "growth-oriented", and the system flags him as suitable for high-equity funds. Two weeks ago, during a 12% portfolio drawdown, he telephoned twice asking to sell everything, and told the adviser he had not slept properly for a week. He has no long-term care cover. His mother spent her final four years in a care home, and he says he would "rather not think about it".
1. How should the adviser reconcile the questionnaire score with Alan's behaviour, and what risk profile should be recorded?
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The questionnaire measures attitude - what Alan says he can tolerate in the abstract. His behaviour in a routine 12% drawdown measures what he will actually do with money at risk, and that is the evidence a suitability file must not ignore. A 12% equity drawdown is ordinary, not a stress event; if it produced insomnia and capitulation calls, the recorded profile of 78/100 is not a description of this client.
Record the lower of attitude and demonstrated tolerance, then test it against capacity. The defensible profile is moderate at most, and the file should say why: questionnaire score 78, but behaviour under a modest drawdown, plus a four-year horizon to the point where withdrawals begin, plus an essential-spending floor that is not yet funded. The adviser should also note that the platform's automated flag reflects the questionnaire alone and is not a suitability decision.
Practical steps: hold a structured second conversation probing the last time he lost money and what he did; explain the difference between volatility and permanent loss; show him what the current allocation would have done in a 2008-type year in money terms, not percentages; record the conversation, the revised profile and the client's acknowledgement. If Alan insists on retaining a growth allocation, document the advice against it and the risk he is accepting. Leaving the old score in place while behaving differently is the failure mode that produces complaints and compensation claims later.
2. Quantify Alan's funding position and show what it implies for the appropriate equity allocation.
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The income gap at 65. Required HK$40,000 − guaranteed HK$17,000 = HK$23,000 a month, or HK$276,000 a year, to come from the portfolio. Note this is before any care cost.
Portfolio at 65. HK$7.8 million grown for four years at 4% net = roughly HK$9.1 million, plus HK$2.5 million lump sum = about HK$11.6 million, less the mortgage if he clears it. The mortgage will have about five years remaining at 65; clearing it takes HK$1.9 million off liquid assets but removes HK$19,800 a month of outgoings - a guaranteed return on that money equal to the mortgage rate. After clearing, roughly HK$9.7 million supports HK$276,000, an initial withdrawal rate of about 2.8%.
Implication. A 2.8% real-terms draw plus a guaranteed income floor does not require a 78% equity allocation to work; a balanced allocation in the 45–55% equity range with a cash-and-short-bond floor has a credible success rate over a 30-year horizon. A growth-heavy allocation only raises the probability of a bad early sequence, which the client has already shown he cannot tolerate.
Room left unaddressed. No long-term care cover against a four-year care precedent is an unfunded liability that must be reserved for or insured, which further reduces risk capacity. The adviser should show the numbers, not assert the conclusion.
3. State your recommendation and explain how the deviation from the platform's default suitability flag should be documented.
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Recommendation: reduce equity to roughly 50%, hold three years of essential spending (about HK$1.4 million) in deposits and short-dated bonds so that no equity sale is forced in a drawdown, and rebalance on pre-set calendar or threshold rules rather than by discretion - this removes the decision that Alan has shown he gets wrong under stress. Clear the mortgage at 65 from the lump sum if the rate exceeds the expected after-tax return on bonds; the guaranteed saving is worth more to this client than the marginal return. Price long-term care cover while he is still insurable, and if he declines, earmark a reserve and record the refusal.
Documentation, in this order:
- The evidence base - questionnaire score, drawdown behaviour with dates, second interview notes.
- The reasoning - required income, gap, withdrawal rate, care exposure, and why capacity for loss is narrower than tolerance.
- The recommendation and each alternative considered with its trade-off.
- The deviation from the platform flag, stated explicitly, with the platform output retained in the file.
- Alan's signed acknowledgement that he accepts a lower expected return in exchange for a lower chance of being forced to sell at the wrong time.
Keep the file defensible on process as well as outcome: a later complaint will test whether the adviser identified the behavioural evidence, not whether markets cooperated.