This column, the second in a two-part series, recommends steps advisors can take to develop a readiness strategy to protect themselves against senior clients’ complaints. The first column, published on Aug. 24, explored four key risks associated with serving senior clients.
As Canada’s population continues to age, serving senior clients — and being aware of their special needs — is becoming a greater part of an advisor’s daily workflow. However, this task is becoming a more risky endeavour as there are more and more claims being made from senior clients, or their beneficiaries, who assert that their advisors breached their regulatory or legal obligations.
Thus, here are three steps you need to follow to reduce these risks:
1. Document everything
The reason for any changes in a client’s portfolio must be documented in detail. That’s because regulators and judges will rarely believe an advisor’s version of events over the version provided by the senior client (see Marlin Investments Inc. v. Modovan, 2014 BCCA 364) unless there is documentation to support the advisor’s version.
Advisors must plan for the changing needs of senior clients living for multiple decades after they stop working. They might stop working as early as 55 (or earlier) and live to the age of 90 (or older), but their needs change over these decades and there may be several unexpected expenses, such as medical care or a family member needing financial support.
As a result, you must account for these potential scenarios when developing a financial plan for your clients — and you should document the explanations the senior client has provided, and the questions he or she has asked, with respect to the financial plan and any changes you have made to it because of these discussions.
2. Don’t succumb to senior clients’ unsuitable demands
A common problem suffered by those nearing or at retirement is that they may realize too late that they may not have saved enough to continue to live in the manner in which they are accustomed. These seniors put pressure on their advisors to pull a rabbit (or money) out of their hat.
Sometimes, instead of advisors giving clients advice they might not want to hear — such as telling them to tighten their belts, sell their beloved cottage, or get a part time job, which is a sure way to lose clients — they tell their senior clients that the only way to obtain higher returns is to invest in more risky investments.
However, if the senior client loses money and sues the advisor, or complains to the regulator, then the advisor will be in the hot seat. Specifically, the advisor will need to prove that the senior client was in a position in which he or she could withstand losses as a result of taking on more risk — an almost impossible argument to make in these circumstances.
Furthermore, senior clients will inevitably assert at the time of the lawsuit that they didn’t understand the risks they were taking and blindly accepted the advisor’s advice to assume more risk — even though the clients said they understood the risk at the time.
Even with a sophisticated client, this is a very difficult argument to make successfully because the senior client will inevitably assert that he was unable to comprehend the advice given fully, even if the advisor can swear up and down that, indeed, the client understood it
So, I do not suggest that the advisor increase the risk of the investments for clients who are older than 60 years of age, even if the client seemed to have a clear understanding at the time of the meeting and wanted to assume the higher risk.
3. Don’t succumb to the pressure of those appointed pursuant to a power of attorney (POA)
When taking instructions from someone other than the client, ask whether all steps taken are in the senior client’s best interest. Even though the senior client may have far more money than he or she might need for the rest of his or her life, there cannot be gifts given to the POA or others before the senior client’s passing.
Although refusing to distribute money to the POA for someone other than the senior client, such as the son or daughter, could lead to the account being moved to another advisor, all decisions pertaining to the account must be in the interest of the senior client, not the POA. The money is only to be distributed to others after the death of the senior, in accordance to their Last Will and Testament. Thus, you need to become familiar with your dealer’s policies and protocols intimately so that when a POA form is delivered, you know what steps to take.
The role of an advisor has changed significantly with respect to serving senior clients and their unique needs. Keeping a paper trail of communication with all clients is important, but keeping an even more detailed paper trail of communications with senior clients is necessary. So, ensure that you adjust your practices and protocols so that you, your business and your reputation are protected from lawsuits and regulatory complaints from this growing segment of the population.
This part two of a two-part series on the risks faced by advisors serving senior clients.