Andrew and Amelia were looking to top up their pension before retiring trusted the guidance of their financial adviser. But when the investment lost value, they called on us.
What happened
Andrew and Amelia had a dog grooming business. They were both in their late sixties and wanted to retire, so they had a look at their finances to see whether they could afford to stop working.
They decided that they needed to find a way of topping up their pensions and one way of doing it was to release some equity from their house. So they sold their house and bought a smaller one and still had £75,000 left over. They got in touch with a financial adviser to get some advice on what to do with the money.
They told the adviser that they only wanted to take a small amount of risk and that they wanted to use the growth from their investment to supplement their income.
The adviser agreed that Andrew and Amelia should be cautious with their money. She advised them to put the money into a range of investment funds, with two thirds invested in company shares on the stock market and the other third in gilts issued by the government.
A couple of years later, Andrew and Amelia received a statement about their investment. They were worried when they saw that their investments had lost a lot of their value and contacted their financial adviser to find out what had happened.
The adviser said the investment had lost value because the value of shares on the stock market had fallen. She pointed out that Andrew and Amelia had been looking to get enough regular growth out of their investment to supplement their income.
This meant that they’d needed to invest a large proportion of the money in funds that invested on the stock market. The adviser said that this had given them the best chance of getting the return they were looking for.
Andrew and Amelia weren’t convinced so they asked us to look into it.
What we said
When we assessed the evidence, we noted that Andrew and Amelia had been looking for fairly significant growth from their investment to supplement their income. We concluded that to achieve this sort of return, they’d probably have needed to take on more risk than they’d told the adviser they were prepared to take.
We took the view that the adviser should have explained this more clearly to Andrew and Amelia from the beginning. And we didn’t think it justified putting two thirds of Andrew and Amelia's money in stock market funds. This had put their investment at greater risk overall than they’d been prepared to take.
We agreed that Andrew and Amelia needed to invest cautiously.
We told the adviser to look at what would have happened if half their money had got the same return as the APCIMS Income Index, and half had got the same return as the average rate for one-year fixed-rate bonds as published by the Bank of England.
We decided that this calculation would take into account both Andrew and Amelia's desire for a degree of security and their willingness to take a small risk. It would also allow for the fact that even with appropriate investments, Andrew and Amelia could have made losses as well as gains.