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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Case Studies in Comprehensive Financial Advice

A client, Mrs. Latha Iyer, says she is very risk-averse but also insists on a target return that can only be achieved with a high equity allocation. What should the adviser do?

The adviser should discuss the conflict with the client, explain the risk-return trade-off and revisit the goals, time horizon or savings rate. Simply following the return target or ignoring it would fail the suitability requirement.

  1. AAllocate heavily to equity since the return target decides the plan
  2. BIgnore the return target and invest only in her risk-tolerance comfort
  3. CDiscuss the conflict, explain the trade-off and revisit goals or timelineCorrect
  4. DChoose any allocation and record it as suitable

Explanation

When risk tolerance and required return conflict, the adviser should educate the client on the trade-off and adjust goals, time horizon or savings. Ignoring either side or documenting without discussion breaches suitability duties.

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