The retirement drawdown that did not fit the risk score
Margaret, 63, plans to stop work at 65. She has $420,000 in a balanced KiwiSaver fund, $180,000 in term deposits, and a mortgage-free home. Her partner died two years ago and she has no emergency fund. She wants $28,000 a year before tax from her investments from age 65 to 75, then NZ Super. Her risk questionnaire scores her 'growth' (7/10), but she tells you she cannot tolerate a 15% fall in the first two years of withdrawals. She asks you to move the whole KiwiSaver balance into a global equity fund with a 0.35% fee and a five-year return of 11% p.a. She is a retail client, has not used a financial adviser before, and wants advice by Friday. You hold a FAP licence covering nominated products, not DIMS.
1. What onboarding and suitability steps must you complete before giving advice?
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Start with identity verification and AML/CFT customer due diligence, then build a full picture rather than relying on the 7/10 score. You need her income, assets, liabilities, tax rate, health and aged-care risk, existing KiwiSaver scheme and fund, term-deposit maturities, and any family support. Critically, test capacity for loss as well as willingness: she has no emergency fund, a short withdrawal horizon for the first tranche, and a stated inability to tolerate a 15% fall. The $28,000 withdrawal is 4.7% of $600,000, which is already high for a 10-year drawdown; after a 15% fall it becomes 5.5% of $510,000. Check the product list and your licence scope, confirm you are not providing DIMS, and document the client's goals, risk profile, reasonably available alternatives, and why any recommendation meets her objectives. If she cannot fund the first two years from cash and term deposits, the advice must address sequencing risk before considering a 100% growth allocation.
2. Is a 100% global equity fund suitable for the whole KiwiSaver balance? Show the reasoning with numbers.
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No. A 100% global equity fund has high short-term volatility and no defensive assets to fund withdrawals in a down market. If $600,000 falls 15%, she has $510,000 and a $28,000 withdrawal is 5.5%; if it falls 30%, she has $420,000 and the withdrawal is 6.7%. That is a sequence-of-returns risk because withdrawals lock in losses. Her stated tolerance and lack of emergency fund contradict the questionnaire score. The 11% p.a. past return is not a promise and may reflect a period that will not repeat. A more suitable structure would hold a cash and short-duration bond bucket for two to three years of spending, a diversified income and balanced allocation for the medium term, and only a limited growth component. The global equity fund could be part of the growth allocation, but not the whole balance. If ongoing rebalancing and implementation are required, check whether that triggers a DIMS licence.
3. What disclosure and records should support the advice?
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Disclose your licensing status, the nature and scope of the advice, any product or advice fees, commissions or conflicts, and the product fees of the recommended fund. Explain the difference between the 7/10 score and her capacity for loss, and ensure she understands the recommendation in plain language. Record her financial situation, goals, risk tolerance, capacity for loss, the alternatives considered, why the global equity fund was not recommended for the full balance, the recommended allocation, and any client instruction to the contrary. If she insists on the 100% global equity fund, document that advice was given against it and consider whether you can implement it consistently with your obligations. Keep the disclosure and advice records for the required period and make them available for review.