Not stating how a new product better meets a client’s risk profile

This is another common reason for recommending a switch – that the new product better meets the client’s risk profile.

With regard to risk, there are two typical errors in client’s existing portfolios. The first is that the portfolio is too conservative and does not suit clients with longer timeframes and a greater ability to withstand short to medium-term fluctuations in investment values. The problem here is typically too little exposure to growth markets and an over-reliance on cash and cash-type investments.

This kind of problem is relatively easy to address: the adviser recommends a graduated process of transferring assets into more growth-targeted investments (the gradual process manages timing risk). Typically, this can be relatively-easily automated, using direct debit or even BPay facilities.

The second problem is the opposite: the portfolio is not conservative enough and the client has been left exposed to more volatility than their situation warrants. The problem here is typically that all or much of the clients’ portfolio is held in volatile ‘growth’ markets, even though the timeframe for the client needing to potentially liquidate and then use the investment is relatively short. The solution here is the opposite of the one above – the adviser needs to commence a process for liquidating the growth assets and transferring the portfolio into a more suitable investment type. (Again, timing risk must be managed here).

By the way: our preferred time period for growth investments – effectively property and shares – is ten years plus. Any need by a client to access their money in a timeframe shorter than this indicates a conservative approach should be taken. The thing to avoid at all costs is a client needing to sell price-volatile assets at a time not of their choosing. If a client is going to need their cash within the next ten years, then the priority must be maintaining what is already there.

The Dover Group