Every advisory firm knows the importance of treating their customers fairly. They also know that treating ‘vulnerable customers’ fairly requires special care. What’s not so clear is what this means in practice.
What, exactly, makes a client ‘vulnerable’? How do you evidence that you’ve done what’s required to identify them? And, having identified them, what do you need to do next?
In this article, we take a comprehensive look at what comprises vulnerability in a personal-finance context, the importance of a robust process for monitoring vulnerability across a client base, and some examples of how the outputs of such a process could be used in practice.
We also look at what the regulations say. The treatment of vulnerable clients is the next big thing on the regulatory radar. Following their specific guidance on the topic (subsequently reinforced as part of Consumer Duty), the publication of the FCA’s formal review of the treatment of vulnerable clients is due this quarter.
Financial Vulnerability and Behavioural Vulnerability
There are four key aspects to vulnerability in a personal-finance context, the last of which is often largely, or completely, overlooked:
- Health Vulnerability – Based on age, physical health, and cognitive ability.
- Capability Vulnerability – Based on gaps in Knowledge and Experience and Investment Sense (understanding of basic investing principles).
- Financial Vulnerability – Based on financial circumstances (e.g. those with very low Risk Capacity, or those with high but imbalanced Risk Capacity, for example those disproportionately dependent on a single property).
- Behavioural Vulnerability – Based on behavioural tendencies towards poor immediate-term emotional decision making, even in the context of sufficient financial, physical, mental, intellectual, and experiential resilience.
The first three of these are generally well-considered, at least in the most clear-cut cases. It would be a rare adviser who, noting that a client was in their 90s, or showing obvious signs of cognitive decline, or that was making their first (or potentially last) ever investment, didn’t at least flag that they could be ‘especially susceptible to harm’ (to use the FCA’s phrasing).
However, Behavioural Vulnerability, just as crucial as the others, is almost always dealt with cursorily at best, if not overlooked entirely.
For example. Consider the FCA’s own key ‘characteristics of vulnerability’, namely:
- Health – Health conditions or illnesses that affect ability to carry out day-to-day tasks.
- Capability – Low knowledge of financial matters or low confidence in managing money (financial capability). Low capability in other relevant areas such as literacy, or digital skills.
- Life events – Life events such as bereavement, job loss or relationship breakdown.
- Resilience – Low ability to withstand financial or emotional shocks.
Leaving aside quibbles about whether ‘life events’ is really a distinct characteristic of vulnerability, so much as a common trigger to pay even closer attention to the other categories, the key issue is lumping together financial and emotional resilience.
They’re very different things! We can – and should – assess them separately. Treating them together in this way encourages the emotional aspect to be tagged on as an afterthought. It needs a category of its own. This is especially true if you want to make use of these categories in first identifying vulnerable clients, and then helping them in specific ways.
Assessing Behavioural Vulnerability should be a non-negotiable part of any vulnerable-client identification and interaction process. It tells you what to do differently, for whom, and when, evidenced by more than mere age or assets. This could be anything from more thorough communication, to different journey design (for example with more stringent sign-off procedures), to allocation of more adviser time and attention... whatever best meets the greater duty of care required for these clients.
The Importance of Behavioural Segmentation
In our measure of Behavioural Vulnerability, we include five components of our wider Financial Personality Assessment:
- Composure (low is more vulnerable).
- Confidence (low is more vulnerable... though overconfidence can also be dangerous).
- Familiarity Preference (high is more vulnerable).
- Financial Comfort (low is more vulnerable).
- Impulsivity (high is more vulnerable).
High or low scores on any of these measures should result in different personalised prescriptions as a matter of general behaviourally conscious suitability, be that for communication or portfolio recommendations. A combination of extreme scores crosses the threshold into ‘Behavioural Vulnerability’ but it would be wrong to think that it is only those that would benefit from having their investment experience tailored to their unique recipe of behaviours.
For a high-level view of how these outputs could be used in practice, let’s look at two common use cases: tailoring communications in times of market turbulence, and assessing the suitability of a guaranteed income.
As the FCA note: ‘Firms should take particular care when communicating with consumers in vulnerable circumstances, taking account of their needs.’ Partly, this refers to specific communication needs associated with low capability or physical disabilities (such as failing eyesight). However, vulnerability conscious communication goes beyond taking extra time to explain your way around jargon, or making Ts and Cs available in braille.
The message you send is not always the same as the one that’s received. In times of market turmoil especially, the same message delivered to two different people can lead to two markedly different outcomes. The mere existence of numbers in a communication can reassure one person, while overwhelming another.
Each investor’s financial personality signature determines, to some extent, how they’re likely to react to both market changes, and adviser communications about those changes – in terms of content, medium, frequency, timing, and tone.
Messages sent to investors with low Composure, low Confidence, and high Impulsivity need extra care to ensure that they’re received as intended.
Behavioural Vulnerability can also be vitally important in determining the suitability of an investment recommendation. For example, purchasing a guaranteed income – a common consideration for vulnerable clients.
As we explain in more detail in our Suitable Drawdown whitepaper, the suitable amount of guaranteed income to purchase, and the risk to take with the portfolio that remains invested, can differ substantially for clients with identical risk tolerance, in identical financial situations, and with identical knowledge and experience… based on certain aspects of their behavioural signature.
Take Care to Be Comprehensive, Continually
Just as it’s vital, when assessing an investor’s ability to take investment risk, to measure both their financial ability (their risk capacity) and their emotional ability (their behavioural capacity), the same is true of vulnerability.
This is not a one-shot assessment. As the FCA note: ‘all customers are at risk of becoming vulnerable’ and ‘customers may move in or out of vulnerable circumstances at any stage.’ This is particularly true of the ‘health’ aspect of vulnerability, though financial (and even in some cases behavioural) factors can move quickly too. In any case, a good vulnerability assessment is dynamic. It relies on a robust process for not only assessing vulnerability at a given point in time, but monitoring it throughout a client’s investing journey. Doing this well, reliably, at scale – and evidencing that it’s being done – requires behaviourally conscious technology. Contact us to find out more.
Article originally published in Portfolio Adviser on 17/02/2025.
