This column, the first in a two-part series, explores some of the key risks associated with serving senior clients. The second column will recommend steps advisors can take to develop a readiness strategy to protect themselves against senior clients' complaints.
Serving the needs of senior clients is becoming a more integral and critical part of the average advisor's job — but one fraught with substantial risk. Thus, advisors need to ask themselves whether they're ready to serve the needs of senior clients and if they conduct their businesses in a way that protects advisors from this increasingly large group of litigious clients?
The typical case is one in which Mrs. Brown, a widow in her 80s, issues a complaint with the help of her son, Max, who sees his inheritance diminishing and wants to blame his mother's advisor for losses in her account. The allegation is that the investments were unsuitable given the age of the client.
Such cases are happening in greater frequency along with the aging of the population. In fact, most cases I defend for advisors or securities dealers are against clients who are older than 70 years of age. Here are four reasons why this is happening on a greater scale:
1. Statistics Canada (StatsCan) has reported that people aged 65-plus hold 24% of Canada's wealth. StatsCan also confirms people are living longer; by 2036, men are expected to live to 82 and women to 86. Because the elderly are perceived as vulnerable, there's great pressure on regulators to protect seniors like Mrs. Brown. A positive response by the regulators, including the self-regulatory organizations (SROs), is education, which is a good thing. However, as part of that education, seniors are directed to sue their advisors in court proceedings; take their case to the Ombudsman for Banking Services and Investments (OBSI) for free; or take regulatory matters directly to the SROs or the provincial securities commissions.
Furthermore, regulators do not pursue every client complaint, but instead choose which client complaints to pursue and which to close or issue a private warning or caution letter. The SROs confirm that complaints from seniors take priority. With every press release that shows the regulators are protecting seniors, the better the regulators look to the investing public.
2. Taking a complaint to OBSI is free and if senior clients, like Mrs. Brown, are pursuing sums of $350,000 or less, they can proceed to make a complaint without having to take on any expenses. If the sum claimed is greater than $350,000, Mrs. Brown can hire a lawyer for free as lawyers will take cases on contingency, which means she pays nothing until there is a settlement or trial; assuming she wins, the lawyer will get a slice of the award. Before accepting a case on a contingency fee basis, lawyers assess the likelihood of a win for the client and, therefore, also for the lawyer. When a lawyer meets an elderly client who wants to sue their advisor and his or her dealer, the lawyer sees dollar signs.
3. Many senior clients have not saved enough for their retirement and so they seek higher yields from their portfolios. Elderly clients learn that the only way to get higher yields is to invest in more risky investments, and they choose that over other alternatives their advisors have suggested, such as tightening their belts or getting a part-time job. Although advisors might have cautioned their senior clients that they could also lose money, the senior clients convince the advisor that they understand and accept the risk.
However, when senior clients lose money, they sue their advisors — and it doesn't take long for the elderly clients to figure out that they should say they followed their advisors' advice blindly and never understood that they were assuming more risk. My job as a lawyer who defends advisors and their dealers, of course, is to determine whether the senior clients are lying and get them to admit this, which isn't usually difficult.
4. It's more commonly the case that instructions on senior clients' accounts come from someone other than the senior pursuant to the delivery of a power of attorney (POA). The person instructing the advisor — say, Max on behalf of Mrs. Brown — might be telling the advisor to invest the money more aggressively or seek to liquidate the investments to provide a gift to himself.
The introduction of taking instructions from the likes of Max introduces a whole new complexity to the client/advisor relationship. Advisors and dealers have not necessarily established, trained and ensured that advisors are following protocols in respect of the multitude of issues that arise as a result of these circumstances. Hence, there are more cases by disgruntled beneficiaries, such as Alice, Max's sister, who asserts that the advisor and dealer did not act in the interest of the senior client, Mrs. Brown, but instead acted in the best interest of her son, Max.
So, there are many dangers associated with serving senior clients and you need to ask yourself whether you are ready to deal with them. The next column in this two-part series, which will be published on Sept. 21, will recommend certain measures you can take to protect yourself against the growing risk of senior client complaints.