Whatever He Thinks Is Best
Client: 79, widowed in 2019, living in a private care home. Assets: HK$6.4m in Hong Kong dollar time deposits maturing this month, a rental flat worth HK$1.1m, and her former home worth HK$3.2m. Her income need is HK$18,000 a month for care fees plus HK$10,000 for herself, and care inflation has been running near 5%. Her son, 52, attends every meeting, answers most questions for her, and has no power of attorney. She twice asks during the meeting whether her husband knows about "this", and says "whatever he thinks is best". She has no will and no enduring power of attorney. The file you are shown proposes a single-premium ten-year product with a 6% upfront charge, a surrender value below principal until year seven, and a projected return of 5.5% a year. The son wants "the highest return - she won't need the money". Your manager mentions this would be your strongest quarter.
1. Is this a capacity issue, a suitability issue, or both? What do you do in the room?
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Both, and they must be handled separately.
Capacity red flags: repeating a question about a husband who died seven years ago, deferring every decision to her son, and being unable to restate the purpose of the meeting. I am not qualified to diagnose, and I must not. But I am required to satisfy myself that the client understands what she is buying.
What to do, in order:
- Identify the client. Confirm she is the account holder and that instructions must come from her.
- Speak to her alone for at least part of the meeting. A private conversation is both a control and a courtesy; a client who cannot speak freely cannot be advised.
- Teach-back. Ask her, in her own words, what the product does, how long the money is locked up, and what happens if she needs it in year three. If she cannot answer, the sale stops.
- Escalate the capacity question through the firm's vulnerable-customer procedure, and discuss with her - gently and separately from the son - whether a lasting power of attorney or a trusted contact should be arranged.
- Document contemporaneously: who said what, who was present, what she understood.
Suitability, independently: even with full capacity, a seven-year break-even and a 6% upfront charge against a 79-year-old with rising care costs and a probable need for capital inside five years is unsuitable on needs grounds. Capacity and suitability are two independent grounds for declining; either is sufficient.
2. The son argues that with HK$6.4m she can afford to lock up half. Evaluate that argument and propose an alternative.
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The argument fails on liquidity, not on affordability. He is right that she will not spend HK$6.4m on herself. He is ignoring when she will need it.
Liquidity arithmetic. Current draw is HK$28,000 a month, HK$336,000 a year. At 5% care inflation that is roughly HK$547,000 in ten years; cumulative draw over ten years is about HK$4.2m. Care needs can also step up abruptly - a higher-dependency room, nursing, hospitalisation.
Cost of the proposed product. The 6% upfront charge is HK$384,000 on the full amount, and the surrender value does not regain principal until year seven. If she needs capital in year three - precisely the most likely window - she crystallises a loss on top of the need. A 5.5% projection is not a promise, and it is being compared against a certainty of charges.
Alternative structure:
- Years 1–3 of spending in cash and short-dated high-grade bonds - roughly HK$1.1m, untouched by market risk.
- Years 4–10 in a diversified HK$ income portfolio or a shorter-pay annuity with a guaranteed period, chosen after checking surrender terms.
- The rental flat reviewed for yield and for whether it should be sold to fund care, since it is illiquid but is genuine capital.
- A will and a lasting power of attorney, referred to a solicitor - she has neither, and the estate will otherwise be contested between siblings.
That meets the son's return objective for the surplus without putting her care funding at risk.
3. What are your conflict-of-interest and documentation obligations, and how do you handle your manager's comment?
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Disclosure. The 6% upfront charge must be disclosed in dollars, not as a percentage buried in a projection, together with any commission, trailer or override I or the firm receive, and any softer inducement. A client who is told "HK$384,000 comes off the top before your money is invested" tends to answer the suitability question herself.
Authority. The son holds no power of attorney. He can be consulted; he cannot instruct. If the firm accepts his instruction, it has a conduct problem regardless of what the client signs.
Documentation: the vulnerable-customer assessment, the private-conversation note, the teach-back result, the needs analysis showing the ten-year liquidity requirement, the alternatives considered and why they were rejected, the charge disclosure, and any advice I gave that the client declined.
The manager's comment. Quarterly targets are not a client factor and must not enter the file. If I am pressed to proceed against my judgement, the sequence is: state the concern in writing, seek a second adviser or a supervisor in the meeting, escalate to compliance if the pressure continues, and decline the transaction if the suitability gap remains. A signed acknowledgement from the client does not cure an unsuitable sale - it only evidences that the firm knew the risk.
The professional answer: I would rather lose the quarter than hold a seven-year lock-up sold to a 79-year-old who may need the money in year three and cannot explain what she bought. If the transaction proceeds over my objection, my dissent goes on the file, dated.