However, assessing low mental capacity or cognitive disability, for example, should be reserved for clinical practitioners and is not something that would be easy to identify using technology alone, nor should it be expected of a financial adviser.
Using technology to put robust questionnaires in place and collecting data that may be useful in assessing vulnerability, ensuring that they are re-taken frequently, particularly before any changes are made to a customer’s financial position, is going to be vital from a compliance perspective.
Nevertheless, for most advisers, and indeed the wider industry, assessing a customer as vulnerable is still a confusing area, which is why it is imperative that companies put the correct governance in place to provide training and guidance to their employees to help them recognise the four drivers in real life and ensure they are taking vulnerabilities into account when interacting with customers.
The FCA states that to examine a client’s vulnerabilities, particularly in regard to their financial resilience, it is important to use both objective measures, such as whether a client missed paying their bills in three or more of the past six months, and subjective measures, such as whether a client losing their main source of income for as little as a week would be a heavy burden.
Academic research highlights that subjective factors of vulnerability such as a client’s confidence in managing their finances and impulsive behaviours are important for assessing clients' vulnerability. Therefore, innovative measures are required so that objective measures of vulnerability are not solely relied upon, such as a client’s level of debt or their savings.
Subjective factors of vulnerability are important to assess as a client’s ability to manage their emotions, for example, can influence the level of distress they experience during a challenging life event.
Subjective characteristics are embedded within the FCA drivers broadly relating to emotional resilience and self-efficacy, but these areas require more of a psychometric approach.
Validated psychological measures of emotional resilience, financial self-efficacy, intolerance of uncertainty and emotion regulation already exist.
And Dynamic Planner has conducted research that employed versions of these measures, finding that items such as 'I worry about running out of money one day' and 'I can handle whatever financial difficulty comes my way' are significant predictors of how clients react to periods of market volatility, both in regards to their decisions to disinvest or stay invested, and their feelings of concern or optimism.
