As part of the SEC’s 2017 Exam Priorities, one of the three key areas that the SEC noted as a “hot button” issue to be examined was protection of elderly clients. Specifically, the SEC noted that it would pay close attention to areas where a senior citizen might be subject to financial exploitation or fraud as well as the potential practices of financial advisors or brokerage firms recommending products that might not be suitable for such investors given their stage in life.
Going forward, it seems logical that the SEC will focus on other areas where senior citizens and their investment portfolios may be impacted completely outside of the control of their financial advisor. For example, the SEC may focus on practices that would protect seniors and their holdings in the event that their physical or mental capacities have diminished to an extent that they are no longer in a position to make good decisions regarding their personal wealth. This article will focus on ways that the financial advisor can proactively look for signs of diminishment and formulate ways to protect the aging client, the family as well as the financial advisor.
According to AARP, the baby boomers—the 80-or-so million Americans who have started or are headed toward retirement control more than $13 trillion in household investable assets with one in six Americans projected to be 65 or older by the year 2020. This group also includes the 65-and-older population that will increase from 40.2 million in 2010 to a projected 88.5 million by 2050. (AARP, A Financial Professional’s Guide to Working with Older Clients). Given these figures, it is likely that many of your clients fall into this category or will over the next several years. Accordingly, the periodic check-in with aging clients to go over financial portfolios and to inquire whether their tolerance for risk has changed for any number of reasons, may expand into discussions or other issues that the financial advisor may not have anticipated.
For example, a financial advisor may be among the first to detect a decline in their clients’ mental and physical capacity as they age or succumb to illness or dementia – especially if family members live in different cities or states. As we have heard directly from many advisors over the years, this dynamic can produce some of the most challenging moments in the advisor/client relationship. Specifically, financial advisors (i) have been deluged by requests from family members to know more about the client’s accounts given the client’s situation; (ii) have had meetings with aging clients where the advisor questioned whether the client was truly “all there”; and (iii) have been subject to vocal and sometimes abusive comments where the advisor is often accused of not following the client’s wishes or not delivering a strong enough portfolio performance.
So what can the financial advisor do in these situations? Below are some suggestions.
Become a Better Listener
Although it seems obvious, actually listening to what is coming out of the older client’s mouth is probably the best way to discern whether any changes in cognitive behavior have started to affect the client’s overall demeanor. Through their answers, financial advisors can digest what has been relayed to them and construct a series of questions, while maintaining the client’s comfort and trust, that will help the financial advisor reach a conclusion as to whether their client may be suffering from any diminished capacity issues and/or memory loss.
Over-document Your Communications
Fully documenting all of your phone calls and face-to-face meetings will provide financial advisors extra protection from potential liability when dealing with clients with reduced capacity and memory loss. Also, sending follow-up correspondence to the client fully outlining what was discussed in a meeting or phone call further creates a paper trail – especially with elderly clients who have shown signs of hostility toward the advisor.
Thorough documentation will prove to be invaluable in preventing or defending any future litigation brought by an elderly client’s family who were not privy to the regular communications between the financial advisor and the client prior to the client’s death or complete incapacity.
Protect Your Client’s Privacy
Once a client’s diminished capacity is generally known by the financial advisor and the client’s family, it may seem like the right thing to do by providing all of the information regarding the client’s accounts to family members in order to maintain a certain level of continuity. However well-intentioned a financial advisor’s cooperation with family members may be, helping out like this is the wrong thing to do. One of the key aspects of acting as your client’s fiduciary is safeguarding your client’s personal and financial information in accordance with SEC Regulation S-P. Although it may seem like family members become your client when a client loses his/her mental faculties, absent legal documentation to the contrary, they are not your client and information about the client’s accounts cannot be shared.
Contact Your Client’s Attorney
Most older, high net worth clients have an estate planning attorney who has helped them establish their wills, trusts and other forms of wealth-transfer vehicles. Once the financial advisor senses any signs of diminishment in mental capacity, the first call should be to the client’s attorney. Putting the attorney on notice of your observations will have multiple benefits. First, if the client cannot truly act as the “client” anymore because of diminished mental state, the attorney can work with the family or the client’s assigns to prepare the proper documentation such as powers-of-attorney or trust documents so that someone other than the elderly client can act as the financial advisor’s client with respect to the applicable accounts. Next, by putting the attorney (and correspondingly, the family) on notice, until you hear otherwise, you can continue to manage your client’s portfolio in accordance with your then-existing risk profile without future risk that you were acting in a way that was not in line with what your client conveyed to you. Finally, by contacting the attorney, you have created a record voicing your concerns. As such, you have transferred the burden onto the attorney and the client’s family to take the proper actions to protect the client and his financial affairs.
Schedule a Family Meeting
If the client does not have an estate planning attorney or the financial advisor is not comfortable contacting the attorney directly, the financial advisor can schedule a meeting with the client and a family member of the client. A financial advisor can simply voice some of these concerns to the client and suggest that they schedule a meeting with the client and a nearby family member. In this meeting, the financial advisor can convey his/her reservations about the advisor/client relationship given the client’s attention, memory or whatever sign or symptom that the financial advisor has noticed that has given rise for concern. Once again, this will put the family on notice that you have expressed concerns about the client’s going-forward ability to act as your client with a sound mind.
In conclusion, it is a good idea for a financial advisor to come up with an Elderly Client Gameplan to protect you as well as the client and their family. The gameplan can be tailored to the services provided by your office and the types of clients you have. But, at a minimum, should include the suggestions outlined above:
- Listen for signs of changes that may indicate diminished mental capacity
- Fully document all communications with the elderly client
- Don’t share confidential information regarding your client’s accounts without proper legal documentation
- Contact your client’s estate planning attorney Schedule a family meeting