By Tim Farmer, Clinical Director at Comentis
When considering the impact of the rising cost of living on financial vulnerability, it’s tempting to say that everyone will simply be worse off; that people won’t be able to afford essentials such as food, shelter and heat, and that levels of financial vulnerability will therefore rise.
The reality is much more complex.
Guidance from the FCA refers to four drivers of financial vulnerability: health events, life events, capability and resilience. When thinking about the rising cost of living, it’s tempting to point to the ‘life event’ category and forget about the others. But to do so means we’re likely to miss the true impact.
The crisis in which we find ourselves will be felt across a number of different areas, and the resulting levels of financial vulnerability will depend on how each individual responds. So, while the obvious impact on financial health needs to be considered, a financial adviser must also consider the impact on physical, emotional and mental health. When we consider the cost-of-living crisis through that lens, we see that we aren’t looking at one driver, but all four.
Pieces of the puzzle
To take all four drivers into account, we need to understand how they work together. And while the combination of these drivers will differ for each individual, there is a process that can be used to determine how the jigsaw will look.
A financial adviser will need to start by identifying the trigger event – in this case, the rise in prices – and the resulting impact upon the individual’s current and projected future financial situation. Next, they will need to consider the person’s capability, to help determine the type of financial decisions they’re likely to make. For example, can they apply their financial experience to their current situation to come up with a plan?
This should then be combined with the adviser’s understanding of their resilience – are they going to disengage or will they hunker down and implement an identified plan? How is their mental health affected? Finally, the adviser will need to combine this with their understanding of any physical condition the person may have or that may arise as a result of the cost-of-living crisis. Will they be able to afford the necessary care – or to put it simply, to heat their houses and put food on the table?
Combine all of these factors, and you should have a good indication of your client’s level of financial vulnerability.
None of us know how long the cost-of-living crisis is going to last or the extent of the detriment it will cause. What we do know, however, is that while everybody will be affected in some way, understanding the full extent of the vulnerability it will cause is going to be far from straightforward.