The Retiree, the Lock-Up and the Sales Trail
Mr. Huang, 68 and retired, holds CNY 1.2 million: CNY 900,000 in a three-year deposit maturing in six weeks at 2.6%, and CNY 300,000 in a money market fund. He draws CNY 4,000 a month for living costs and expects CNY 60,000 of medical expenses within 18 months. His risk questionnaire on file is four years old and was filled in by his adviser, Mr. Shen, who ticked "growth" without interviewing him. Mr. Shen now proposes moving CNY 800,000 into a five-year closed-end equity fund: 2% front load, 1.5% annual management fee, no redemption before maturity, and a maximum drawdown of 38% over the past three years. The distributor pays Mr. Shen's branch a 1.2% sales trail on the amount invested, and branch bonuses are calculated on gross sales. Mr. Huang says, "You decide, I don't understand these things," and signs the application without reading the risk disclosure. A complaint later arrives from his daughter.
1. Using the numbers, assess whether the CNY 800,000 switch is suitable. Show the liquidity, loss and cost arithmetic.
Read the worked answer
Test the recommendation against three constraints the client actually has.
Liquidity. Within 18 months he needs CNY 60,000 of medical costs plus 18 × CNY 4,000 = CNY 72,000 of income, i.e. CNY 132,000. After the switch his accessible assets are CNY 400,000 (the MMF plus the CNY 100,000 deposit residue). That covers roughly three years of spending - but CNY 800,000, two-thirds of his assets, becomes unreachable for five years. A client whose horizon is five years of monthly withdrawals should not hold a five-year lock-up as the core holding.
Loss capacity. A 38% drawdown on CNY 800,000 is a paper loss of CNY 304,000 - about 25% of total assets - at a point where he cannot sell and cannot stop the loss. His stated need is capital preservation with income; the product's risk profile is incompatible.
Cost. The 2% front load is CNY 16,000, four months of his income draw; the 1.5% annual fee is CNY 12,000 a year on a declining balance. He must earn 3.5% before he is flat in year one, on top of the equity risk.
Conclusion: unsuitable. The proportion, the lock-up and the client's liquidity profile each fail independently.
2. Identify the conflicts of interest in this sale and explain how each should have been managed, not merely disclosed.
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There are three conflicts, and they compound.
1. The 1.2% trail. On CNY 800,000 that is CNY 9,600 a year for five years. Compensation tied to the amount invested, not to the client outcome, biases the adviser toward the highest-paying product. Managing it means the recommendation must be justifiable on the client's facts independent of the trail - and the firm should be able to show a cheaper suitable alternative was considered.
2. Gross-sales bonuses. Bonuses on gross sales reward volume and ignore persistency, complaints or suitability outcomes. A control here is to weight incentives toward net assets, client retention and suitability audit results, and to require second-line sign-off on switches above a threshold for clients over a stated age.
3. The adviser completing the client's questionnaire. This is the most serious, because it destroys the evidence base for every later judgement. Risk profiling must be captured by the client, or at minimum read back and independently witnessed.
Disclosure alone does not manage any of these: a client who says "I don't understand these things" cannot consent meaningfully to a conflict. The firm must eliminate or control the incentive, and must document why the recommendation survived that control.
3. What does "you decide, I don't understand" mean for the adviser's obligations, and what should the file contain?
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It increases rather than transfers responsibility. A signature is evidence of disclosure received, not of suitability assessed; where the client expressly disclaims understanding, the adviser cannot rely on the signature to show informed consent.
Obligations that remain:
- Re-establish an accurate risk profile before recommending, given the four-year-old, adviser-completed questionnaire.
- Present the recommendation in terms the client can actually evaluate: what he can withdraw, when, what he can lose in a bad year.
- Where the client cannot or will not engage, the adviser must default to the client's objective circumstances - income need, liquidity need, age, medical contingency - not to a signed tick-box.
- If the client insists on an unsuitable product, document the advice given, the alternative recommended, and the client's specific written instruction; the firm may decline the order.
File should contain: a client-completed, dated risk assessment; the recommendation rationale with the rejected alternatives and their costs; the conflict disclosure with the actual remuneration amount; the suitability sign-off; the cost illustration over the full five years (CNY 16,000 plus 1.5% annually); and the client's own words on liquidity needs. The daughter's complaint should be investigated as a suitability event, not a service complaint.