Unwarranted departures from conservative advice

At Dover, our starting principle is that people are conservative investors. It is a truism of finance that prudence plus patience provides plenty. Ten years is our preferred timeframe for any form of equity or property investment. Any attempt to create wealth – via investment – in a shorter time period than this needs to be approached cautiously.

Accordingly, we think that advisers who decide that their clients are anything other than conservative need to be able to make a very good case as to why that is so. Too often, we see SOAs that simply do not specify the facts underpinning the conclusion that a client should invest vary from this conservative assumption. Remember, any such conclusion needs to be one that would be agreed to by a ‘reasonable’ financial planner meeting the same client.

An SOA cannot simply say “you and I agreed you should be a strong growth investor”. The SOA has to specify the facts you relied on to form your opinion. If it does not, you are walking on shaky ground, as this document from the Financial Ombudsman Service makes clear.

There is some basic psychology at work here. Often, clients come to a financial adviser in the expectation that your advice will make them rich – “just like it did for my cousin Elizabeth. She bought shares in 1999 and she has done very well. I want to invest in shares too.” Clients typically don’t understand the concept of downside risk. These clients – the gung-ho ones who want to make as much money as possible – will readily tell you they are an aggressive investor. They will maintain that approach for about as long as it takes for their investment to start losing money, at which time they may turn up wearing Hush Puppies and a cardigan and talking about lawyers.

And it will be at that stage that you will need to be able to present a very good case as to why you recommended something other than a conservative approach. Remember: you are unlikely to get in trouble for being too conservative when it comes to risk and return. But being insufficiently conservative is another matter Make sure you have a very good justification any time you want to move away from a conservative approach.

The Dover Group