With Consumer Duty regulations now in place, never has financial vulnerability been a hotter topic.
Advisers will need to demonstrate that they are identifying and supporting each and every client at risk of financial vulnerability. But this raises several challenges. After all, most advisers lack the clinical background and expertise to recognise the subtle signs of vulnerability. Moreover, a particularly significant hurdle is that there are several misconceptions about who, exactly, can be at risk. Specifically, many of the advisers we speak with assume that financial vulnerability is determined simply by how much money a client has in the bank. In other words, if someone is wealthy they can’t be at risk.
Not only is this mindset untrue, if left unaddressed it will cause scores of vulnerable clients to go unidentified and unsupported.
Why is this assumption wrong?
The FCA has set out four key drivers that might result in a vulnerability; health events, life events, resilience and capability.
The issue is that financial advisers tend to think – understandably – in terms of money. If a client is able during the present cost-of-living crisis to comfortably pay the bills or buy high-value items, they can’t possibly be vulnerable.
But the FCA has said that vulnerability is a more complicated issue. A wealthy individual can still be at risk of a health event, such as a cancer diagnosis, or a life event, such as the death of a loved one. As they grow older, they may have to navigate cognitive issues or changes in their social circumstances, threatening both their resilience and capability.
The four drivers are what cause vulnerability, which means being wealthy doesn’t prevent a client from being at-risk. So why do we think it does?
Why do we think this way?
There are various theories that might explain this mindset. One of the most pressing, however, is that plenty of advisers honestly don’t realise they have vulnerable clients, something which presumably stems from a lack of understanding of the four drivers.
In fairness, we do tend to find in our conversations with advisers that they’re aware of the drivers. But there seems to be a real disparity between what they think they need to do and what’s actually required. For instance, there’s lots of talk around understanding simply being a case of better communication, when in actuality, communication and understanding are very different.
It’s also possible that wealthy individuals themselves are making it more difficult for advisers to offer appropriate support. For one thing, they might not even be aware they’re at risk. Just as a financial adviser may lack the clinical expertise to connect a change in social circumstances with financial vulnerability, so too might the client.
But there’s also a very real sense of shame surrounding the prospect of being vulnerable, prompting people from all walks of life to shy away from discussing it. For a highly successful businessperson, whose identity is wrapped up in being perceived as competent and independent, it’s especially difficult to let someone know when things actually aren’t great. They present an image to the world of who they are, and admitting the truth of their situation can be a real struggle.
So a lack of insight is certainly playing a role. But the problem is also being exacerbated by clients themselves not wanting to be vulnerable.
What can be done?
First, advisers have to understand that wealth doesn’t insulate against vulnerability. This will require a thorough, working understanding of the FCA’s four drivers, and the willingness to challenge our own preconceptions and cognitive biases. It may even require expert training.
Next, firms must create environments in which clients can feel comfortable disclosing that they’re struggling. It’s about being attentive, listening closely and going the extra mile to offer safe, non-judgemental spaces in which clients can talk openly about their circumstances.
But while these are important considerations, they’re ultimately starting points. What advisers really need is the means to accurately and consistently identify signs of vulnerability. And for that to be achieved, especially when clients themselves are less than forthcoming, a third-party specialist solution is the most sure-fire approach.
Technology-driven assessment tools exist that can help, removing bias and subjectivity from the process, and ensuring consistency across a whole client base. These kinds of solutions are, arguably, the only way to ensure all vulnerability drivers are in scope, for all clients. By combining clinical expertise with hard data, they’re able to reassure firms that their systems and controls will adequately meet the scrutiny of regulatory requirements.
In the long run, this process will benefit everyone; clients and insurers alike. If you’re struggling, or if you know that you need to bring in additional expertise, don’t delay.