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How to assess suitability and risk for vulnerable clients

This article is part of
Guide to advising vulnerable clients

How to assess suitability and risk for vulnerable clients

According to the 2015 Occasional Paper, the Financial Conduct Authority is clear financial services firms – from large lenders to small advisory firms – have a duty of care to the client.

It is also taken as read that, whenever giving investment advice, advisers must look at suitability and risk tolerance.

But how do these guidelines apply when it comes to clients who might be vulnerable, or become so during the course of the adviser-client relationship?

For Tony Gammon, director and head of client service at Thesis Asset Management, the first thing to understand is that vulnerability might not always be long-term, or permanent.

He comments: “Being a vulnerable client is not necessarily a permanent state of affairs. 

“For those who have recently suffered bereavement, divorce or job loss, then delaying decisions that are designed for the long term might be appropriate.”

At its most basic level, all investment advice needs to be suitable, regardless of the state of the client at any time.

Keith Richards, chief executive of the Personal Finance Society, comments: “Vulnerability does not necessarily change the suitability of any given investment product or the client risk profile.

“The former remains dependent upon specific client need, although especially complex product solutions may require greater thought in terms of ensuring the vulnerable client understands the recommendation.”

However, Mr Richards warns: “Both attitude to risk and capacity for loss may be temporarily or permanently changed by the nature of vulnerability.”

Pitfalls

Stephen Lowe, group communications director for Just Group, warns there are “some obvious pitfalls” firms need to avoid when designing the advice process, because of the potential detriment to vulnerable clients.

He says: “The most basic is the need to have a written strategy or policy on vulnerability, which is understood and implemented by trained staff at every level of the business.”

This will underpin any work on assessing suitability with clients, he says, and will help the adviser to be “sensitive to the client’s individual needs and how these evolve over time”.

In particular, Mr Lowe warns that to ensure suitability of investment products, the adviser must be mindful of the changing risk profile of a client, especially as vulnerabilities may start to emerge over time.

He explains: “Investment advice must be tailored to the vulnerable individual’s particular situation and understanding, mindful of overcoming behavioural biases and conflicts of interest.” 

Mapping 

Deloitte’s eight-page briefing note on the Financial Conduct Authority’s 2017/2018 mission statement stipulates the importance of firms carrying out ‘mapping’ of their client base.

The Deloitte paper states: “For firms, the FCA’s approach to vulnerability is likely to present challenges, particularly as the definition used by the FCA appears to be very broad.

“Firms should consider undertaking vulnerability mapping of their businesses and customer bases in the light of the FCA’s statements.”