NZ CFS L5 Investment common mistakes
NZ CFS L5 Investment · Understand the traps and how to avoid them.
When assessing suitability, the candidate recommends a product with a higher risk rating than the client's agreed risk profile without documenting any justification or client consent.
Candidates treat the risk profile as a box-ticking exercise rather than a boundary that can only be exceeded with documented rationale and explicit client agreement; they also confuse 'risk tolerance' with 'risk capacity' and assume a high-capacity client can automatically take high-risk products.
What to do instead
Before finalising any recommendation, compare the product risk rating to the client's risk profile. If higher, either select an alternative or record the specific reason (e.g., client's explicit desire for higher risk with a small portion of the portfolio), the client's informed consent, and the impact on their goals. Use a documented risk-profile override form and explain the trade-off in the advice file.
The candidate applies a single 'balanced' or 'growth' asset allocation to every client regardless of time horizon, liquidity needs, or goal priority.
Candidates memorise model portfolios and default to a middle-of-the-road allocation because they are unsure how to translate multiple goals with different timeframes into a single investment plan; they also overlook the need to segment assets by goal.
What to do instead
Practise building goal-based allocations: map each goal to a time horizon, required return, and liquidity need, then assign a separate sub-portfolio or bucket. Document why each asset class is included and how the combined portfolio meets all goals. Use a checklist that forces consideration of short-term cash needs versus long-term growth.
The candidate calculates tax on investment returns using only the investor's marginal tax rate and ignores PIE rates, the prescribed investor rate (PIR), and the tax treatment of different product types (e.g., shares vs. managed funds vs. term deposits).
Candidates conflate personal tax rules with PIE rules and do not verify the client's correct PIR; they also forget that some investments are taxed on realised gains while others are taxed on accrual or attributed income.
What to do instead
For each product recommended, state the applicable tax regime, the correct PIR based on the client's income history, and the after-tax expected return. Use a tax decision tree: identify product type → identify tax entity (individual, PIE, trust) → apply correct rate → show after-tax outcome. Cross-check with IRD guidance and document the client's PIR election.
The candidate recommends a financial product without checking whether it is on the provider's approved product list or whether the candidate holds the required authorisation under the Financial Markets Conduct Act and the provider's licence conditions.
Candidates focus on client needs and product features but forget the regulatory perimeter: not all products can be advised on by all advisers, and some products require specific disclosures or are restricted to wholesale clients.
What to do instead
Before recommending, verify the product's regulatory status (e.g., whether it is a financial product under the FMCA, whether it is on the approved list, and whether the adviser's licence covers it). Document the check in the advice file. If the product is outside the scope, refer the client to a specialist or explain why it cannot be recommended.
The candidate records the client's goals and risk profile but fails to link them to the recommendation, producing a file that shows no clear rationale for why the recommended product is suitable.
Candidates treat the advice process as a series of forms to complete rather than a logical argument; they also run out of time and skip the 'why' section, assuming the product's features speak for themselves.
What to do instead
Write a suitability statement that explicitly connects each client goal and risk constraint to the recommended product's features, expected return, and risks. Use a template: 'Client goal X requires Y; product Z provides Y because...; the main risk is...; this is acceptable because...'. Have a peer review the file for logical gaps before submission.
The candidate treats the initial advice as a one-off event and does not set a review schedule or describe triggers for ad-hoc reviews (e.g., market movements, life events, product changes).
Candidates focus on the initial recommendation and forget that ongoing suitability is a regulatory expectation; they also assume clients will call if something changes.
What to do instead
In the advice document, specify a review frequency (e.g., annual) and list review triggers (e.g., portfolio drift beyond a set threshold, change in client circumstances, product closure). Set a calendar reminder and record the next review date in the client file. At review, compare actual performance and allocation to the plan and document any changes.
The candidate recommends a managed fund or KiwiSaver scheme without disclosing the fund's fees, the impact of fees on returns, and any conflicted remuneration the adviser or provider receives.
Candidates underestimate the long-term effect of fees and assume the client will read the product disclosure statement; they also forget that conflicted remuneration must be disclosed under the FMCA and the Code of Professional Conduct.
What to do instead
Calculate and show the estimated total fees over the client's horizon and compare with alternatives. Disclose any commission, soft dollar benefit, or ownership interest in the provider. State clearly how the adviser is remunerated. Use a fee disclosure checklist and include a worked example of fee impact in the client file.
The candidate confuses 'risk tolerance' with 'risk capacity' and recommends a high-growth portfolio to a client with a short time horizon because the client says they are comfortable with volatility.
Candidates rely on a questionnaire score without probing the client's actual financial ability to withstand losses; they also fail to distinguish emotional tolerance from financial capacity.
What to do instead
Assess both tolerance (willingness to accept risk) and capacity (ability to absorb losses without derailing goals). Use separate questions and document the evidence. If tolerance exceeds capacity, recommend a portfolio aligned with capacity and explain why. If capacity exceeds tolerance, consider a lower-risk portfolio or education to bridge the gap.
The candidate recommends a product with a lock-in period or illiquidity without checking whether the client may need access to the funds for a stated short-term goal or emergency.
Candidates focus on expected return and diversification but overlook liquidity constraints; they also assume the client has other liquid assets without verifying.
What to do instead
Map the client's cash flow needs and emergency fund before recommending any illiquid product. Ask specifically about upcoming large expenses (e.g., house deposit, education fees) and document the client's liquid reserves. If liquidity is needed, recommend a liquid alternative or allocate only a portion to the illiquid product.
The candidate provides advice on a product or strategy that is outside their competence or licence scope (e.g., direct shares, derivatives, overseas property) without referring to a specialist.
Candidates want to be helpful and fear losing the client, so they overstep their expertise; they also may not know the boundaries of their authorisation under the provider's licence.
What to do instead
Know your competence and licence limits. If a client's needs fall outside them, explain the limitation, refer to a specialist, and document the referral. Use a 'scope of advice' statement in the client engagement letter and check it before making any recommendation. If unsure, escalate to a supervisor.