It not uncommon for an adviser to suggest a client invest in gold, in one form or another.

The SOA comes through to the SOA review team, they identify the offending suggestion, observe gold is not on Dover’s approved product list, and refer it through to Terry McMaster as the Responsible Manager for a determination.

The determination will almost certainly be “a reasonable financial planner would not agree that an investment in gold is appropriate and in the client’s best interests.

Why is this so? Why is Dover unlikely to allow an adviser to recommend gold?

First, gold does not pay a rent or a dividend to its owner. This means it has no intrinsic value and is purely speculative in nature. It’s a bet. And there are transaction costs (including storage costs) and opportunity costs which mean it’s probably, in the sense of “more likely than not”, going to be a bet that is lost. Gold is a zero net gain play, and there are costs, which means most people if not all people will lose if they invest in gold.

Second, few clients have an investment risk profile suited to a speculative investment. It’s just too risky compared to the alternatives. It’s extremely unlikely that the Financial Ombudsman Service will agree with you, once the client complaint is lodged, that gold really was the best investment available to your client.

Third, there are better long term wealth protection strategies. Australian bank shares are paying a sustainable grossed up effective dividend above 10%. Inflation is running at about 1.5%. It’s extremely unlikely gold will out-perform Australian bank shares over the next ten years.

Same story for Australian property. Australian property has averaged more than 12.5% over the 20 years to 31 December 2016. It’s extremely unlikely gold will outperform Australian property over the next ten years.

What if a client wants to invest in gold?

Just because a client wants to invest in gold does not mean you should recommend they invest in gold. If a patient tells a doctor she wants her arm cut off, it is no answer to the negligence action to say “but she wanted me to”. If the doctor amputates without a sound scientific case that amputation is in the patient’s best interests and appropriate.

It’s the same for financial planning advice. You are the professional, and you owe the client a general law duty of care and a statutory duty to act in the client’s best interests and to make sure your advice is appropriate to the client. The test for whether you have done so derives from the common law and is in effect “would a reasonable financial planner have provided advice like this?”

What if your client does not accept your advice?

Sometimes clients will not accept your advice.

Don’t be surprised. I am sure there are lots of smokers out there who have not accepted their doctor’s advice to stop smoking (eat better, exercise more or whatever the advice may be).

Here your SOA, and all related documents including file notes and client e-mails, should make it very clear that you did not recommend gold and your client invested in gold despite your advice.

 For example, your SOA could include a series of sentence like these:

“You intend to invest in gold. You have determined to do this despite our clear advice, even warning, that you should not do this, and it’s not in your best interests for you to invest in gold.

We will facilitate the investment for you, as a service to you. But this should not be interpreted as approval or a change of mind on our part.“

It’s a good idea to back this up with clear file notes and of course client e-mails are the best file notes: clear, unequivocal, neatly typed, dated and not able to be denied by the client.

Any exceptions

The only exception we allow is based on materiality.

If for example a client was interested on having 1% of a $1,000,000 investment portfolio in gold, we would not change our mind, or our warnings, but probably we would ultimately surrender to an insistent client, based on materiality.

Short of something like this, there are no exceptions.