The Panic Call After a Two-Year Gap
Ken, 72, retired, has $650,000 in a 60/40 managed portfolio and draws $40,000 a year. His wife died 18 months ago; he moved to a smaller home and now has $100,000 extra cash but has not told his adviser. The adviser’s firm was acquired and Ken’s file was reassigned; no review has been held for two years. Markets have fallen 12%, the portfolio is now $590,000, and the equity weight is 52% after the fall. Ken calls in a panic after seeing the news and says ‘sell all the shares, I can’t take another drop’. He also mentions he needs $25,000 for a roof in six months. The file shows a risk profile of ‘balanced’ and an original plan to draw $35,000 a year, not $40,000. The adviser has 30 minutes before another meeting and is tempted to place the sell order to calm him.
1. Should the adviser place the sell-all order? What immediate steps should be taken?
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The adviser should not place a sell-all order in a 30-minute window. Selling all equities after a 12% fall would lock in the loss and convert temporary volatility into a permanent outcome. It would also move Ken from a 60/40 portfolio to a cash or fixed-income portfolio, which may not fund his withdrawals over his lifetime.
The immediate step is to acknowledge Ken’s anxiety and slow the conversation down. The adviser should establish whether the $100,000 cash is genuinely available outside the portfolio. If it is, the $25,000 roof cost can be met from cash, and near-term withdrawals can be funded from cash and fixed income rather than selling shares. If the $100,000 is not available, the adviser should raise the $25,000 from the fixed-income part of the portfolio and set aside a short-term reserve.
The adviser should not confuse a request to stop the pain with a considered instruction to change the strategy. They should explain the difference between volatility and permanent loss, confirm Ken’s capacity to make the decision, and book a full review. If Ken insists on selling something immediately, a limited sale to fund known cash needs is more defensible than selling all equities.
2. What suitability and review issues does the file reveal, and what should the adviser assess?
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The file is out of date. Ken’s wife died, he downsized, he has $100,000 of new cash, his expenses may have changed, and his withdrawal is $40,000 rather than the planned $35,000. On $590,000, a $40,000 draw is about 6.8%, which is high for a balanced portfolio and may not be sustainable. The equity weight has drifted from 60% to 52%, so the portfolio is now more defensive than the target, not less. A sell-all instruction would overcorrect.
The adviser should reassess Ken’s goals, income needs, health, time horizon, risk tolerance and capacity for loss. The death of his wife may have changed his risk profile and his need for liquidity. The adviser should also check whether the $100,000 cash should be used as a spending reserve, to reduce the portfolio withdrawal, or to rebalance. A suitable plan might hold two to three years of withdrawals in cash and bonds, keep a diversified growth allocation for the longer term, and reduce the withdrawal rate if possible.
The original ‘balanced’ label is not enough. The adviser needs evidence that the current strategy still meets Ken’s objectives.
3. What monitoring, communication and compliance actions should follow?
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The adviser should communicate in plain language, avoid technical jargon and give Ken a clear next step rather than a rushed order. They should explain what has happened to the portfolio, what has not changed, and what options exist: use cash for the roof, sell a limited amount of fixed income, rebalance gradually, or reduce withdrawals. Ken should be given time to consider the options and should confirm any instruction in writing.
The two-year gap is a service and monitoring issue. The adviser should check the FAP’s agreed review frequency and the client-care and records standards. If the firm’s policy required an annual review, the adviser should report the gap to compliance and document why it occurred. The file should be updated with the new circumstances, the revised risk profile, the cash-flow analysis, the alternatives discussed and the final instruction. A review should be scheduled within a short period, with triggers for market falls, health changes or spending changes. The adviser should not let the next client meeting prevent a proper response to a vulnerable client.