Dover’s rule against share trading

As a follow up on Friday’s comments on share trading, Peter Thompson has noted this article to me, and it makes sense to pass it on to you: http://www.aifa.com.au/articles/portfolio-construction/reasons-to-invest-long-term All share based investment recommendations have to be expressed to be for a minimum holding period of ten years, and only blue chip shares are permitted. This means share trading is not allowed. You will find that you will have more clients, and your clients will stay with you much longer, probably for decades, if you follow this approach. More happier clients and longer client retention means your revenue, cash flow and market value will be much higher than otherwise, and you will not be the object of successful FOS complaints when the market heads down, as it will. If you have recommended a short term trading orientated strategy, and the market turns down, the starting point is that you are negligent…. Incidentally, this AIFA article is exactly the sort of article you should send to all your clients, and include as a hypertext link in all SOAs that you prepare that discuss shares. Clients will respect its integrity and you will ‘stand on the shoulders of giants” to borrow from Einstein (although I just checked Wikipedia,  and it sounds like he pinched it from someone else…).  Dover encourages hypertext links to authorative writings as a way of substantiating your argument. If you can find something sensible that supports your view you should link it in to your SOA.

You must explain why your client is not a conservative investor

Dover advisers have to treat all clients as conservative unless two conditions are met. These conditions are:

  1. the client says they do not want to be conservative and want to be growth orientated; and
  2. a reasonable financial planner would agree that the client should be growth orientated.

When these two conditions are present you can treat the client as being growth orientated. Your SOA has to set out why a reasonable financial planner would agree that your client should be more growth orientated, specifically mentioning fact such as the client’s age, health, income (size, stability and longevity), wealth position, occupation, education and training, and prior investment experience. Other relevant facts, such as expected inheritances can be mentioned on a case by case basis. An example paragraph might read like this:

“We discussed your attitude to risk and you said you believed you should be a growth orientated investor. We considered this and in summary believe a reasonable financial planner would agree. You are age 40, and have plenty of time to recover if the market falls, are in good health with a reasonable income ($90,000 pa) and reliable long term employment with adequate income continuance insurance. Your partner earns $60,000 a year part time, and this can be scaled up if need be. You  work in a SME and see commercial risk all the time, and have a reasonable amount invested already: you know that all investments can fall in value. Your wealth position is above average for our age and you are able to salary sacrifice an extra $10,000 a year in super. “

Obviously the wording will differ from client to client, and the weight attached to each test will differ from client to client, but all SOAs must include a paragraph roughly  like this one unless the client is being treated as conservative It is not enough to say “You said you wanted to invest aggressively”, or “we discussed risk and agreed you should be a high risk investor”. Both these sentences are negligent if a reasonable financial planner would not have agreed. So you must cast your mind to what a reasonable financial planner would think, and most importantly, record this in your SOA. I hope you are well and that all is well.