Consumer Duty has raised the bar when it comes to the depth to which advisers must assess clients’ vulnerabilities. In this analysis, Louis Williams PhD FHEA, Head of Psychology & Behavioural Insights, Dynamic Planner, warns of the risks of a ‘one-size fits all approach’ and why the nature and value advice can be a significant factor in boosting clients’ resilience.
As readers will no doubt be aware, the Consumer Duty emphasises that firms must act to deliver good outcomes for all retail customers, especially those in vulnerable circumstances or who are more susceptible to experiencing periods of adversity that impacts their finances and their financial decisions. The FCA expect that action taken and improvements made by firms as a result of the Consumer Duty will particularly benefit those with characteristics of vulnerability.
Identifying vulnerabilities
Research by the FCA through their annual Financial Lives Survey (FLS) gives insight into general trends of vulnerability across four drivers (Health, Life events, Resilience and Capability), however limited research examines vulnerability characteristics of those who receive financial advice. Dynamic Planner’s Financial Wellbeing questionnaire captures vulnerability characteristics in line with the FLS and FCA guidelines and has now been live for 6 months. Clients are asked questions regarding their physical and mental health, and recent significant life events. A proportion of questions assess resilience in terms of a client’s finances, for example if they struggled with paying their monthly domestic bills, whilst others were designed to understand how clients regulate their emotions and their abilities to bounce back from difficult periods. Finally, the questionnaire explores a broad range of capabilities clients may or may not have, for example, knowledge in financial matters and digital skills. All questions are used to analyse a client’s financial wellbeing, their behaviours, and skillsets in order to observe any areas of vulnerability which may impact their financial decisions, and therefore which their adviser should be aware of.
Examining the differences
It is particularly important to consider how clients differ to the public, within both the FLS (2022) and Dynamic Planner’s financial wellbeing questionnaire there are similar questions addressing client’s vulnerabilities. Regarding health and life events, for example, both questionnaires ask if the individual has any health conditions or experienced a negative life event in the past 12 months. However, importantly, interference questions are included as the presence of a vulnerability characteristic is not the only factor that should be considered but also the impact it has on an individual to carry out day-to-day activities. 41% have a health condition, but of these only 3% state that it significantly reduces their ability to carry out day-to-day activities (7% reported in FLS). Furthermore, 34% experienced a challenging life event, but again only 3% stated that it stopped them doing the things they wanted to in life (20% reported in FLS but the interference from life events were not considered).
Our findings support our expectations, that although a significant proportion of advised clients struggle with their health and face difficult life events, the majority do not feel that this negatively impacts their day-to-day life.
The FLS (2022) was completed by over 19,000 members of the public and in the following sections we compare two questions, numbered 1 and 2 and shown within this article, regarding resilience that were included both in the FLS and Dynamic Planner’s financial wellbeing questionnaire.
Q1. To what extent do you feel that keeping up with your domestic bills and credit commitments is a burden?
*3% of DP 2023 (advised clients) selected “don’t know”.
Given that advised clients are of an older age and wealthier than average, the results are not surprising. Approximately 71% of advised clients do not find keeping up with bills and credit commitments a burden at all, in comparison to 40% of the public, whereas 15% of those taking part in the FLS (2022) stated that this was a heavy burden, only 2% of advised clients felt this way.
Q2: If you lost your main source of household income, how long could your household continue to cover living expenses, without having to borrow any money or ask for help from friends or family?
Again, there are large differences between those completing the FLS (2022) and advised clients completing Dynamic Planner’s financial wellbeing questionnaire . For example, 40% of those completing the FLS (2022) could only continue for up to 3 months compared to 15% of advised clients. In contrast, 59% of advised clients could manage for 6 months or longer compared to only 36% of the public.
Some final considerations
Given the Consumer Duty, it is important that firms use assessments that have been designed to measure their client’s overall financial wellbeing and vulnerability characteristics. Identifying areas of vulnerability can help advisers cater for their client’s needs and ensure they are treated fairly, allowing good outcomes for all.
Dynamic Planner’s recent findings particularly focus on advised clients rather than the general UK population and it is important to explore how their vulnerabilities and abilities to manage their emotions may differ. As advised clients are more likely to have had time and experience working closely with their financial adviser, then they may already feel supported and have someone they can turn to when facing difficult financial periods.
An ongoing process
It will be important to continue monitoring responses from advised clients, particularly as firms begin to embed processes into their practice to support those who are vulnerable. Furthermore, clients can become vulnerable at any point in time and the duration of experiencing a difficult period and requiring additional support will differ from person to person. The FLS data is useful and gives an overall picture of vulnerability characteristics, financial knowledge, and financial wellbeing of the UK population. However, Dynamic Planner’s financial wellbeing questionnaire, which incorporates all areas of vulnerability according to the FCA, similar questions to the FLS, additional subjective measures of vulnerability, and an algorithm that considers the severity of vulnerability characteristics, gives greater insight into vulnerabilities of those working closely with a financial adviser.
