Your IndustrySep 21 2017

How to assess suitability and risk for vulnerable clients

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How to assess suitability and risk for vulnerable clients

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.

It is key that the vulnerable client has good independent, third-party support. Claire Trott

“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.”

The paper describes this as “reviewing their policies and approaches to vulnerable customers, and ensure this mapping, and any actions flowing from it, is appropriately documented.”

Speaking to FTAdviser, James Dingwall, chief executive of Thistle Initiatives, says firms must prioritise this in order to make sure they are giving the right advice.   

He says: “It is really important firms understand their client base, know how to identify any vulnerable clients, and understand how to educate advisers to deal with them and bring them into the financial planning remit.”

 

The Deloitte paper summarises: “In particular, firms should assess whether further staff training may be needed to improve awareness and early detection of potential customer vulnerability.”

Lessons to learn

According to the key findings revealed by the FCA’s 2015 report into mortgage lenders’ arrears management and forbearance, there are learnings to be made from mortgage lenders. 

It said when it came to those people most at risk from any future rise in interest rates, many mortgage lenders had been: 

  • Identifying their most financially vulnerable customers.
  • Using credit reference agencies to analyse payment profiles, indebtedness, affordability and behavioural measures.
  • Stress-testing across different rate rise scenarios to identify the impact on contractual monthly installments.
  • Carrying out research to understand what customers know about the type of mortgage they hold, and what the potential impact of an interest rate rise would be for them.
  • Removing barriers that could prevent existing customers transferring to other products to lessen the impact of an interest rate rise.
  • Providing all front-line staff with training to help them recognise signs of financial difficulty and know when to refer customers to a specialist area.

According to Mr Richards: “It is critical for firms to identify a permanent or temporary state of vulnerability for any given client, and have embedded process that supports and provides appropriate solutions for them.”

On page 31 of the FCA’s Occasional Paper, under the heading ‘treating customers fairly’, the regulator states: “Our research points to frontline staff needing to know what to do, being empowered to act in an appropriate way that may be outside standard parameters, and feeling confident in doing so.

“Evidence points to products and services in general needing to be designed with realistic expectations about changes in circumstances in mind.”

Engagement on investment decisions

Mr Gammon also advises bringing other people into the loop when it comes to investment decisions. 

He explains: “For those who are always likely to be vulnerable, advisers can use their experience and a degree of emotional detachment to assist with suitability, but engaging with family or close friends might also be sensible.”

Claire Trott, head of pensions strategy for Technical Connection, says: “It is key that the vulnerable client has good independent, third-party support.

“This may be a family member or other third party, chosen by the client themselves.”

However, she strongly urges people to select a third party carefully, so this person can help both the adviser and the client through this difficult time.

A good question to ask [on investment suitability] is whether you would be totally comfortable justifying the investment advice to the client’s family members, representatives such as lawyers, or the regulator. Stephen Lowe

Ms Trott adds: “To provide the client and adviser with the support needed, they must not be vulnerable themselves, and should have a good understanding of the issues being discussed, and the client’s situation.”

Friends and family are important parts of the process, but engaging also with charities to help train call centre staff might also be useful. 

For example, speaking with FTAdviser, Mark Holweger, managing director of L&G Insurance, said L&G’s call centre staff have been trained by the Samaritans to help make the claims experience better for those people who have been bereaved or are going through a serious or terminal illness.

Mr Richards agrees communication is an important consideration for firms: “Clients should have the ability to choose ways to communicate through channels that best suit the individual.

“Meetings should be done at a particular time of day that reflects the availability of carers, or medication scheduled, and locations that reflect physical limitations.”

But it’s not just communication: it’s about accountability, as Just Group’s Mr Lowe adds.

For him, being able to explain to these third parties the investment strategy and whether it is appropriate is a measure of whether the advice process truly reflected the vulnerability of the client.

He states: “A good question to ask [on investment suitability] is whether you would be totally comfortable justifying the investment advice to the client’s family members, representatives such as lawyers, or the regulator.”

simoney.kyriakou@ft.com