We are seeing a lot of SOAs where the product advice is fine, but where the thinking behind the advice is a bit weak or incomplete. You have to explain why your client is not a conservative investor and is a growth investor. You cannot just say “you are a growth investor because you have a ten year time horizon”. It’s not as simple as that. More detail is needed. In particular, if some facts suggest that the client should be conservative and some suggest the client should not be conservative, you have to weigh them up and see what the net position is. For example:

  • A client may be age 52, and employed in a physical job such as deck hand on wages including overtime etc of $100,000 a year. Yes, this is a high income. But for how long can it be sustained? What is a reasonable remaining working life for a 52 year old deck hand? Is it sensible to assume he can keep working for ten or more years?
  • The client may present as single, but be in a relationship. What happens if the relationship breaks up? What claim might the partner have on the client’s home? Super? Other assets?
  • Are the client’s parents still alive? What is their net asset position? Is it reasonable to assume an inheritance will be received in the next five years? The next ten years? Should this be discussed in the SOA? Should the expected inheritance be included in the assets now?
  • How will the client live after say age 65? Will the client qualify for the old age pension on current trajectories? If the client has a home loan of say $400,000 at age 52, how is that loan going to be repaid by age 65? How is that loan going to be re-paid if the client has to stop working?

Be a bit skeptical about what clients say is their expected retirement age. The ABS says only 9% of workers expect to retire before they are age 60. Nevertheless, the average retirement over the last five years is only 62 for men and 59 for women. (The long term average retirement age is actually much lower: about 55 for men and 50 for women: yes, we are working longer, but bear in mind the widening definition of “working”. If you work just a few hours a week these days you are “working” for these purposes.) You can read more about this here: ABC article on average retirement age, by Michael Janda 10 December 2013.