Table showing recommended investment profiles for different investors
Very conservative investor: ten year time frame  
Defensive Cash
Fixed interest
90% to 100%
Growth Australian equities
International equities
REITs and Infrastructure
No more than 10%
Conservative investor: ten year time frame  
Defensive Cash
Fixed interest
65%
Growth Australian equities
International equities
REITs and Infrastructure
35%
Moderately conservative investor: ten year time frame  
Defensive Cash
Fixed interest
44%
Growth Australian equities
International equities
REITs and Infrastructure
56%
Balanced investor: ten year time frame  
Defensive Cash
Fixed interest
23%
Growth Australian equities
International equities
REITs and Infrastructure
77%
Growth investor: ten year time frame  
Defensive Cash
Fixed interest
11.5%

Growth

Australian equities
International equities
REITs and Infrastructure
88.5%
High growth investor: ten year time frame  

Defensive

Cash
Fixed interest
No more than 10%
Growth Australian equities
International equities
REITs and Infrastructure
90% to 100%

Commentary: some thoughts to consider

FOS preferred tables

These tables are based on tables used by FOS to determine the correct mix of growth and non-growth assets when computing damages claims. It makes sense to base our tables on the FOS tables, as it reduces the risk the CIO (ie our new dispute resolution body) will disagree with our tables.

Tendency to under-estimate long term returns on growth assets and client longevity

Most commentators under-state the historical long term returns on growth assets, and this leads to an inappropriate bias to conservative investment styles.

The Russell ASX Long Term Investment Report 2016 says Australian shares averaged 8.7% pa and Australian property averaged 10.5% in the 20 years to 31 December 2015. Clients who invested conservatively in say January 1995 would be significantly worse off and clients who invested in growth assets at the same time would be significantly better off as a result of their decisions by 2017.

Mandatory minimum holding period for all investments other than cash

This tendency to under-estimate long term investment returns is made worse by the tendency to under-estimate the client’s probable life span. Many clients, and their advisers, do not understand the average 65-year female will live another 22 years, to age 87, and the average 65-year old male will live another 19 years to age 84. (Source: ABS website) and half will live longer with some living much longer.

Ask yourself where your 87-year old female clients would be financially if they had moved out of all their growth assets, including their home, 22 years ago on 1995? The answer is probably “in poverty”.

Minimum holding period on all growth assets

Dover requires advisers to assume/recommend a minimum holding period of at least ten years on all non-cash investment recommendations. This assumption is necessary, since it takes at least ten years for short term fluctuations to average out and for real trends to be observed. This assumption is mandatory and is embedded in every Dover SOA via the Dover Client Protection Policy.

What does this mean for your clients?

This means most clients should not be treated as very conservative or conservative investors, and most clients should be treated as growth or high growth investors over the minimum ten-year holding period.

There will be exceptions, and advisers should always discuss these concepts with clients and consider the client’s response to them to ensure the client is not within an exception and being well exposed to growth assets is appropriate to them and in their best interests. An incomplete list of exceptions includes:

  1. clients who receive a part old age pension, where the amount of the future pension is in effect reduced if their investments perform better. This “pension penalty” reduces the return and therefore distorts the risk/return based investment decision, meaning it is rational for these clients should be more risk averse than similar clients who do not receive a part old age pension
  2. clients in a situation where a short term loss of capital has subsequent greater consequences. An example is a client who has paid a deposit under a land contract and will lose the deposit and the opportunity to own the land if they cannot complete the settlement on the agreed date and
  3. clients who are psychologically fragile and not able to competently handle investment decisions. This may be a permanent condition, such as age induced mental frailty, or it may be a temporary condition caused by a stressful life event such as a death or a significant illness.

Your advice to your client

Your advice to your client must be based on your client’s unique profile, and must be fully explored and explained in your statement of advice.

This means if you are recommending a growth orientated investment strategy you should explain why, and stress that a reasonable financial planner would agree that a growth orientated investment strategy is appropriate to your client, and anchor your advice in the client’s unique facts.

And conversely, if you are recommending a defensive and non-growth orientated investment strategy you should also explain why, and stress that a reasonable financial planner would agree that a non-growth orientated investment strategy is appropriate to your client, and anchor your advice in the client’s unique facts. This should include an explanation of why they are an exception to the normal rule that clients should invest for growth.