The Couple Who Want 80% Growth
Ana (62) and Mike (60) have $1.2 million in a balanced KiwiSaver and a managed fund, a mortgage-free home and $20,000 cash. They plan to stop work at 65 and need $55,000 a year gross from the portfolio until NZ Super starts, then $35,000 a year. Ana has a progressive health condition; they want $50,000 available in three years for home modifications and expect $15,000 a year of health costs from age 65. Their online risk questionnaire scores 8/10 because they answer ‘agree’ to ‘I am comfortable with volatility’ and ‘I want high growth’. They ask for an 80% growth portfolio, saying ‘we need to catch up’. The questionnaire was completed in one sitting, has no capacity-for-loss questions, and Mike answered for Ana. Their last adviser review was three years ago.
1. Explain the difference between risk tolerance, risk capacity and risk required, and assess whether an 80% growth portfolio is suitable.
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Risk tolerance is the client’s emotional willingness to accept volatility and losses. Risk capacity is the client’s financial ability to absorb losses without abandoning their goals. Risk required is the return needed to fund the goals from the available capital. They are different tests, and the lower of tolerance and capacity generally constrains the portfolio.
Here the tolerance score is unreliable: Mike answered for Ana, there are no capacity questions, and the questionnaire was completed in one sitting. More importantly, capacity is weak. The couple needs $55,000 a year for three years, then $35,000, plus $50,000 in three years and $15,000 a year of health costs. An 80% growth portfolio could fall 35–40% in a severe market, or $420,000–$480,000 on $1.2 million. With fixed withdrawals and a short-term $50,000 need, they could be forced to sell growth assets at the bottom. The required return is also unlikely to be 8% plus; a diversified portfolio with a cash and bond reserve may meet the goal with less risk.
An 80% growth portfolio is therefore likely unsuitable unless the cash-flow plan changes materially. Both clients need to be profiled separately.
2. Design a discovery and advice process to resolve the mismatch.
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Priya-type discovery should start again with both clients present, or with separate interviews if Ana prefers. The adviser should gather full cash flow, health and longevity information, the exact cost of home modifications, the timing of NZ Super, other assets and debts, estate wishes and each client’s true reaction to a large fall. The risk questionnaire should include capacity-for-loss and required-return questions, and Ana should answer for herself. The adviser should also check whether the $55,000 figure is gross or net and whether it includes one-off costs.
A bucket approach can reconcile the goals. Keep the $20,000 cash as an emergency reserve, place the $50,000 three-year need in cash or short-dated bonds, and hold two to three years of portfolio withdrawals in defensive assets. The long-term growth bucket can then be sized to the remaining horizon. Stress-test the plan against a 30–40% equity fall and show the couple the trade-off between spending, risk and the age at which the money may run out. Document the final allocation as a range, not a single number, and set a review trigger for Ana’s health or spending changes.
3. The couple still insists on 80% growth. How should the adviser respond and document the decision?
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The adviser should not simply accept the instruction because the clients are insistent. They should show the couple what an 80% growth portfolio could do to their income: a 35% fall on $1.2 million is about $420,000, and with $55,000 withdrawals plus the $50,000 home cost, the portfolio could be depleted much earlier. Use a simple table or scenario, not jargon. Explain that ‘catching up’ by taking more risk can increase the chance of not meeting the goal, not reduce it.
If the clients still want 80% growth, the adviser should offer a compromise, such as a smaller growth allocation with a protected cash reserve. If the FAP permits a directed instruction, the adviser can document that the clients rejected advice, understand the risks, and accept responsibility. But the adviser should not record the 80% portfolio as suitable. If the FAP’s policy requires advice to be suitable, the adviser should decline to implement and consider referring the clients for a second opinion. The file should record the scenarios shown, the clients’ reasons, the alternatives offered and the final instruction.