Concentrated small-cap request near retirement
Peter, 59, plans to retire at 62. His portfolio is NZ$500,000 in diversified managed funds and KiwiSaver. He has a NZ$150,000 mortgage and NZ$15,000 cash. He asks his adviser to invest NZ$180,000 in a NZX-listed small-cap logistics technology company. The company has just announced an acquisition, its share price is up 35% in a month, and a broker note has a target 25% above the current price. The stock trades about NZ$250,000 a day; the proposed position would be about NZ$180,000. Peter's risk questionnaire score is growth, but he says he cannot afford to lose more than 10% of his total portfolio. He wants the adviser to just do it and says he will sign anything. The adviser thinks the company is speculative and has no dividend. Peter has no emergency fund beyond the NZ$15,000.
1. Assess suitability, distinguishing risk tolerance from capacity for loss.
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Peter's growth score describes his attitude, not his ability to bear loss. Capacity for loss is constrained by facts: he is three years from retirement, has a NZ$150,000 mortgage, only NZ$15,000 cash, and says he cannot lose more than 10% of NZ$500,000, i.e. NZ$50,000. A NZ$180,000 position is 36% of the portfolio and more than three times that loss limit if the stock halves.
The stock is speculative: a small-cap, a transformative acquisition, a 35% run-up, no dividend, and daily turnover of about NZ$250,000. A NZ$180,000 position is roughly 72% of one day's turnover, so exiting in a downturn could move the price. The broker target is not a guarantee. The adviser should consider the mortgage: paying down debt is a risk-free return and improves retirement security. If Peter wants equity exposure, a diversified fund or a much smaller satellite position, for example NZ$20,000 to NZ$30,000, is more consistent. The advice should state that the proposal does not meet his stated loss limit and retirement horizon.
2. How should the adviser respond to Peter's instruction to just do it?
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The adviser should not treat just do it as informed consent. First, explain the difference between an advised sale and an execution-only instruction. If the firm offers execution-only, it must still be clear that no suitability assessment is being made, that the client has chosen the stock, and that the client understands concentration, liquidity and loss risk. The firm's policy may decline speculative concentrated trades near retirement.
Second, document the conversation: the 10% loss limit, the mortgage, the emergency fund, the liquidity figure, the broker note's limitations and the alternatives discussed. If Peter still insists, the adviser can offer a compromise: a smaller amount, a staged entry, or a diversified technology fund. If the firm accepts the order, record Peter's unsolicited instruction and acknowledgement in his words, not a generic waiver. Do not use a broad sign-anything waiver to cure unsuitable advice. Escalate if Peter is vulnerable or does not understand the risk.