Will customer vulnerability management take over from assets under management in 2025?

Recently, I was talking to a consolidator of financial adviser businesses about customer vulnerability management and the due diligence around Consumer Duty. The FCA is likely to enforce Consumer Duty over 2025; this therefore represents quite a liability for acquirers if the target firm has not implemented Consumer Duty.

Assets under management (AUM) effectively represents the amount of income an adviser can make from ongoing fees. It is relatively easy to adjust the percentage income from the assets to assess scenarios of income, taking into account fair value changes due to Consumer Duty.

What is far harder to understand is any compliance with vulnerable customer management – how the company has implemented this and the changes it has made. The consolidator I spoke to proposed that they would require all target adviser firms to ensure they had undertaken a customer vulnerability assessment with all customers, as part of their due diligence.

This will give three excellent indicators on the value and potential liability of the business: first, the proportion of consumers with vulnerability assessments indicates the proportion of customers with good relationships (arguably, if the firms does not know their customers characteristics, then the relationship is not that strong); next, the proportion of vulnerable customers identified indicates how well the assessment had been conducted, and finally the proportions and types of support implemented is an indication of how well the firm looks after its customers.

Every wealth manager, and most advisers, will insist they know their customers – and this is broadly true but, without data to evidence it, they will fall short of the FCA’s requirements – as highlighted by recent FCA feedback on Consumer Duty reports. Firms will have little evidence to defend themselves should a claim be made.

According to an FCA survey last year, 49% of wealth managers and 60% of stockbrokers claimed, somewhat improbably, to have no vulnerable customers – the mean is around 50%. A lack of evidence,  or reporting little to no vulnerable customers is a substantial liability for firms and consolidators.

The FCA’s aim for Consumer Duty is to increase trust in financial services, by ensuring that firms put customers’ needs first. Judging the value of an advice firm based on how much commission they make on their customers’ assets would seem at odds with this aim. 

I am sure vulnerable customer management will not replace AUM in 2025, but it will be interesting to see how this develops. There is certainly a need to easily assess firms’ compliance with both Consumer Duty and customer vulnerability – and ignoring these has the potential for consolidators and their private equity backers to catch a cold.