In 2008, Lucia Carter, a retired 64-year-old, divorced her husband of 42 years.

Question

In 2008, Lucia Carter, a retired 64-year-old, divorced her husband of 42 years. As part of the property settlement, the family home was sold and Lucia’s share was approximately $450,000. In addition to this amount the remainder of the property settlement amounted to an additional $550,000. Her total settlement hence amounted to $1,000,000. Since she was going through a difficult adjustment, she decided to rent a unit in Caulfield on a six-month lease but she always intended to buy a unit in the near future.
Lucia went to see a friend Marilyn who was a financial planner to get advice as to how to invest the funds to secure a comfortable retirement. She made it clear to Marilyn that her priorities were income and to make the money work for her. In her initial interview with Marilyn, Lucia indicated that she intended to buy a property in the next 12 months.
On the basis of their conversations, Marilyn assessed Lucia to be a growth investor and recommended the following investments.
Allocated pension (1) $350,000

Allocated pension (2)     $400,000

Bank shares $80,000

Unlisted property trust $90,000
Managed Australian share fund $65,000

Bank account $15,000
In mid-2008, Lucia became concerned about the market fluctuation and the rapid deterioration in the economy. She decided it was time to buy a property to live in and approached Marilyn for the funds. Lucia was shocked when Marilyn told her that it would take weeks to make the funds available as one of the allocated pensions would now need to be commuted to a lump sum. In panic mode, Lucia purchased a unit for $380,000 in August 2008. As the global financial crisis worsened, Lucia found her income declining drastically, the unlisted property trust was frozen and the value of the shares she held plummeted in value. Lucia now found her overall remaining capital had fallen by $250,000. She now had insufficient funds to provide sufficient income for her everyday needs and was forced to apply for the Age Pension.
Review this case and answer the following questions:
a. Was the advisor’s assessment of Lucia’s risk profile correct?

b. Given Lucia expressed the desire to purchase a property in the near future, was the asset allocation appropriate?

c. Was Marilyn truly listening to Lucia’s goals?

Explanation / Answer

a) As mentioned in the questions, Lucia made it clear in the first meeting only that her priorities are regular Income and she intends to buy a property in near future. Considering this, Lucia seems risk averse and she needs Investment which gives regular income. However, the advisor made incorrect decision regarding Lucia's Risk profile as he did not consider her Liquidity needs.

b) No, the asset allocation was not appropriate considering the need of buying a property in the near future.

c) As per the Investment decision made by him, it is clear that he was more focused on Allocated Investment fund and that shows he was not understanding Lucia's Financial Goals.

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