DEFINING A VULNERABLE CLIENT IN A CONSUMER DUTY WORLD

Both the cost of living crisis and the impending Consumer Duty highlight the need to identify a client’s vulnerabilities, determine those who are susceptible to harm, provide appropriate support, and both emphasise and require that advice firms act to deliver good outcomes for all retail customers, especially those in vulnerable circumstances. But how can firms do this?

Asking Clients If They Are Vulnerable Will Not Produce The Right Answers

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The term ”vulnerable” may not be appreciated and should be avoided in conversation. Focus on the goal, which is to support clients, help them grow and elevate their levels of wellbeing.

Clients may struggle to express their emotions or fear how they may be perceived, particularly if recent events are sensitive in nature, and most certainly if no relationship has been established.

Our research shows that, although those who perceive themselves to be vulnerable have significantly more characteristics of vulnerability, people often underestimate their vulnerabilities. Only 14% of respondents completing the financial lives survey (2020) perceived themselves as being vulnerable, and a huge 76% of those who were deemed vulnerable, according to the algorithm, categorised themselves as being “not vulnerable”.

USE A WELL-DESIGNED ASSESSMENT TO ASK THE RIGHT QUESTIONS

When considering the four vulnerability drivers described by the Financial Conduct Authority (FCA) (Health, Life events, Resilience and Capability), certain aspects of the resilience and capability dimensions can be addressed through closed questions or once gaining insight into client’s income and expenditure, but there are subjective elements of these drivers which are often disregarded.

Health Life Events Resilience Capability

Get To Know Your Client

Many of the characteristics of concern relating to health and life event drivers can be assessed during an initial fact-finding process or when discussing life changes during the investment journey. However, it is important that the presence of a vulnerability characteristic is not the only factor that is considered and reported but also the interference it causes for a client to carry out dayto-day activities and the impact it may have on life and investment challenges.

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Subjective characteristics are embedded within the FCA drivers broadly relating to emotional resilience and selfefficacy, but these areas require more of a psychometric approach. Validated psychological measures reflecting emotional resilience, financial self-efficacy, intolerance of uncertainty and emotion regulation already exist and our research that employed versions of these measures demonstrated that items such as “I worry about running out of money one day” and “I can handle whatever financial difficulty comes my way” were significant predictors of reactions to periods of market volatility, both in regards to decisions to disinvest or stay invested, and feelings of concern. This type of approach may not be necessary for all drivers and characteristics, but they are essential if we are to examine subjective factors of vulnerability within a financial vulnerability assessment.

Subjective factors of vulnerability such as confidence and impulsivity have been suggested by researchers to be important; in fact, such abilities or a lack of, can impact the client’s capability to manage their emotions and therefore the level of distress experienced during a challenging life event. Attention should not only be placed on objective factors such as debt and savings.

Demographic information such as age, household income, household size, number of children, ethnicity, employment status, and marital status can be useful for understanding client needs, but they should not be used to categorise clients as vulnerable or not, as all clients are different, and any client can become vulnerable at any point in time.

Every Client Is An Individual

Current research exploring vulnerability and its impact specifically on advised clients is limited and more research is necessary to gain a better picture of client vulnerabilities, particularly as financial resilience is affected by wealth, support networks and financial knowledge.

Using a well-designed assessment that is in line with requirements of Consumer Duty can enable advisers to understand those clients who are highly vulnerable and susceptible to harm in order to provide them with appropriate support.

Characteristics relating to the vulnerability drivers listed by the FCA can differ for each client and this signifies the importance of understanding client’s individual differences, not classifying clients based on stereotypes or physical characteristics.

LOUIS WILLIAMS PHD FHEA HEAD OF PSYCHOLOGY & BEHAVIOURAL INSIGHTS DYNAMIC PLANNER DYNAMICPLANNER.COM