Not matching the advice to the client profile

One very common mistake we observe is an SOA that starts with a statement that the client and the adviser have agreed that the client is ‘conservative’, followed by a recommendation that the client invest in a geared, growth-oriented fund with 80% equities including international entities. That is, a decidedly non-conservative investment recommendation for a conservative client.

The opposite often happens as well. A client might be described as ‘aggressive’ and then have been recommended into very conservative investments. (That said, the term ‘aggressive’ is a term we dislike; we prefer ‘risk-tolerant’ or similar. Only a few clients are likely to like being described as aggressive, and those people are probably not your preferred client anyway).

The recommended product must match the client’s risk preferences. When it does not, the SOA creates a substantial doubt that the recommendations contained within it were not developed to suit the specific client. This can have really serious implications.

For one, any future claim of negligence against the adviser becomes far easier to prove when the SOA itself suggests that the adviser ignored the client’s risk profile. The SOA will do the lawyer’s work for them.

Secondly, an SOA that does not match the advice to the client’s profile creates the distinct impression that the adviser himself does not understand the importance of the risk profiling that has been undertaken.

But perhaps most seriously, when the advice does not meet the risk profile the chance of things turning out badly for the client is greatly increased. By definition, a client with a conservative risk profile has a lower tolerance for loss than other clients. But products with a more ‘aggressive’ basis are more likely to result in a loss situation – that is actually what ‘aggressive’ means.

This can be quite calamitous for the client and is something that must be avoided at all times. The advice must suit the client’s circumstances at all times.

The Dover Group