A settlement, a trust question and an unsigned advice summary
Maree, 52, receives a relationship property settlement of $420,000. She engages adviser Cam under a written engagement letter scoped to 'KiwiSaver and a managed fund investment', expressly excluding insurance, estate planning and tax advice. Cam's $2,500 fee is disclosed. In the second meeting Maree says she wants to put the whole $420,000 into one global high-growth fund, asks whether she should 'put the house in a trust' to protect it from her ex-husband's business creditors, and asks whether the investment will 'reduce the tax I pay on the settlement'. Cam replies by email: 'I'm not a tax adviser but I can't see a problem, trusts are pretty standard.' Cam recommends investing $340,000 and holding $80,000 in cash for a house deposit in three years. Maree emails back: 'Just do the full $420k, I'm comfortable with risk.' No advice summary is signed and Cam invests the full amount.
1. What are the disclosure and scope problems in this file, and how should Cam have handled the trust and tax questions?
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Scope. The engagement letter is clear, and Cam then stepped outside it. Nothing in the file shows Maree being reminded, at the point the questions were asked, that tax and trust structuring were excluded and that she should see a specialist.
The trust comment. 'Trusts are pretty standard' is a substantive opinion on a legal structuring question with creditor implications, given by someone holding himself out as outside that field. A client in a settlement will hear it as reassurance. That is advice outside scope and outside competence, and the qualification in the same sentence does not cure it.
The tax comment. 'I can't see a problem' on the tax treatment of a relationship property settlement is worse, because it invites Maree to treat the tax position as settled. Cam should have said plainly that he cannot comment, that the tax treatment depends on facts he has not been given, and referred her to an accountant.
What good practice looks like:
- Restate the scope in writing whenever the client raises an out-of-scope issue, and record the referral.
- Correct the email in writing once he realises it overstepped, before Maree acts on it.
- Disclose fees, commissions and any conflicts in the form required, and explain the complaints and dispute resolution process.
- Make sure Maree understands the advice, not just receives documents.
2. What should the advice file contain to evidence both the recommendation and Maree's decision to reject part of it?
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The file has to let a stranger reconstruct what happened and why.
On the recommendation:
- Maree's circumstances, goals and the three-year house deposit need, with the $80,000 cash requirement quantified.
- The advice given, the product and fund recommendation, and the reasons: why a single global high-growth fund for money needed in three years is unsuitable, and why some capital was placed in cash.
- Alternatives considered and the risks explained, including a realistic illustration of a market fall in year one.
- Relevant disclosure: scope, fees, commissions, conflicts, complaints process.
On Maree's instruction:
- The recommendation she rejected and the date.
- What Cam explained about the consequences of investing the deposit money: the chance she cannot buy in three years, the possibility of selling at a loss.
- Her instruction in her own words. The email ('just do the full $420k') is useful evidence, but on its own it records a preference, not an understanding of the risk.
- Cam's written response confirming the advice against the instruction and her acknowledgement.
On the signature: a signed advice summary is strong evidence but is not a legal prerequisite. The obligation is to hold a record that evidences the advice and the client's decisions. Cam's file fails that test not because a form is unsigned, but because the reasoning, the risk explanation and the acknowledgement of the deviation are missing.
3. Should Cam have implemented the instruction as given? Explain the professional decision path, including what he should do now.
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No, not on this file.
The reasoning. A client instruction does not convert unsuitable advice into suitable advice. Investing $420,000, including money required for a house in three years, in a single global high-growth fund concentrates market and currency risk against a short horizon and a known cash need. The Code's suitability standard is not satisfied by the client saying she is comfortable.
The path Cam should have taken:
- Make the recommendation, explain the trade-off in dollars (what a 20% fall means against a $80,000 deposit need), and check understanding.
- If Maree still wanted the full amount invested, either decline to implement, escalate within the FAP, or clearly separate his advice from her instruction in writing, with the specific consequences set out and acknowledged.
- Consider a middle path: a defined amount in a conservative option with a documented review date, rather than all or nothing.
What to do now:
- Correct the trust and tax email in writing and confirm the referral to a lawyer and accountant.
- Issue a written advice summary reflecting what was actually recommended versus what was instructed, with the risk explanation.
- Record the deviation and get Maree's written acknowledgement.
- Check whether the fund is even appropriate as a single holding, and set a review date.
Passively executing an instruction the adviser believes is wrong leaves the client exposed and the adviser unable to show the reasoning.