How dealers can protect vulnerable clients

By James Langton | April 27, 2021 | Last updated on April 27, 2021
3 min read

Any client can be a vulnerable client, particularly amid the stress of a pandemic. But vulnerability is not necessarily a permanent condition, and firms can prevent vulnerable investors from becoming victims, says the Mutual Fund Dealers Association of Canada (MFDA).

On Tuesday, the MFDA published a paper to help dealers and reps understand the concept of client vulnerability and possibly prevent client harm.

While age and a lack of financial resources are factors that can increase the risk of vulnerability, the paper stressed that there are numerous other considerations that dealers should take into account when assessing whether clients are vulnerable.

These include health factors, life events (e.g., employment, divorce, death in the family), client capabilities (such as low financial literacy) and resilience (e.g., volatile income, low savings, limited emotional capacity).

“These characteristics of vulnerability are complex and overlapping. For example, a major life event such as a relationship breakdown or bereavement may lead to further vulnerability such as poor mental health or low financial resilience,” the paper said.

The paper also noted that vulnerability isn’t necessarily a permanent state: “All clients are at some risk of becoming vulnerable and they may become more or less vulnerable throughout the course of their lives.”

For instance, transitory factors, such as the onset of a pandemic, may temporarily push otherwise-capable clients into a vulnerable state. The paper noted that Covid-19 “has significantly increased social isolation, which can be a cause of vulnerability and a significant factor contributing to the risk of financial exploitation and investment fraud.”

Dealers should be aware that their actions can either contribute to or ameliorate client vulnerability, the paper suggested: “For example, unsuitable investment advice can lead to greater stress and anxiety or lead the client to take actions that may cause further harm.”

While vulnerable clients are at higher risk of falling victim to fraud, they can also face more mundane challenges, such as making poor financial decisions.

“Vulnerable clients may have reduced ability to analyze short-term and long-term considerations and may fall prey to the promise of an immediate reward. They may fail to detect the longer-range adverse consequences of their actions,” the paper said.

This can also lead to problems for investment firms, the MFDA warned.

“If [dealers] are not able to adequately identify vulnerable clients and understand their potential needs, it can result in gaps in communication, inadequate customer service, unsuitable advice, and poor outcomes for clients which can lead to client complaints,” the paper said.

The paper also set out how firms can help protect vulnerable clients — and themselves — by providing adequate training to recognize vulnerability; supporting vulnerable clients with clear communications, including transparent disclosure of fees and compensation; and providing vulnerable clients with enough time to process information and make decisions, among other measures.

The paper recommended considering the needs of vulnerable clients when approving products for sale, building digital solutions and designing complaints processes.

The paper also noted that clients may not want to be labelled as vulnerable and recommended that firms not use the term in their interactions with clients.

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James Langton

James is a senior reporter for and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.