Protecting vulnerable clients who may suffer from diminished mental capacity or be targets of financial exploitation has been the recent focus of a self-regulatory organization and Canadian securities regulators.
The Investment Industry Regulatory Organization of Canada (IIROC) recently released the results of an investor survey. The survey showed broad support for several initiatives directed at protecting vulnerable investors; namely, identifying a trusted contact person that an advisor can consult if they suspect their client has become vulnerable or is being exploited; and enabling a firm to place a temporary hold on an account if an advisor detects financial exploitation.
Recognizing that it is more likely than ever that advisors will encounter vulnerable clients, the Canadian Securities Administrators (CSA) recently issued suggested practices for advisors working with older or vulnerable clients. The CSA has continued to reframe their comments from a focus on “seniors” to “vulnerable clients,” noting that diminished mental capacity may affect clients at many different ages and stages. The CSA notice includes a helpful list of warning signs that could indicate diminished mental capacity or financial exploitation.
These are all positive initiatives that deserve the attention of advisors, both to protect your clients and to protect yourself. But this also is a cautionary tale for advisors. Your KYC and suitability obligations are not reduced. Rather, they take on a new focus. As part of your regular KYC updates, you should be watching for changes in a client’s behaviour, as they could happen at any time for any client.
For older clients in particular, the CSA suggests more frequent meetings to stay aware of even subtle changes in behaviour. They also suggest asking the client to identify a trusted contact person you can contact if the client shows signs of diminished mental capacity or if you have concerns that the client may be subject to financial exploitation — an idea that investors in the IIROC survey strongly supported.
Regulators have a heightened awareness of situations that result in financial exploitation of vulnerable investors. As an advisor, you will be at risk of regulatory action (or action by your firm or an exploited client) if you have not taken reasonable steps to protect your clients’ interests.
Here are some specific suggestions to protect yourself, and also to recognize the opportunity to better service clients and broaden your practice:
Expand your view of which clients may be vulnerable
Vulnerability isn’t strictly age-related. It can take many forms, be caused by a number of physical or mental factors, and be temporary or long-lasting. Although dealer firms have historically used bright-line tests (for example, an age cut-off) to determine when a client should be subject to vulnerability protections, this is no longer going to be enough. As regulators broaden their focus, so should you.
Consider different strategies for investing
A traditional approach to investing as clients age is to move them into lower-risk, income-producing assets. However, as the CSA notice points out, Canadians are living longer than ever before. This presents both a challenge and an opportunity for advisors to help older clients structure investment portfolios that will generate the income they will need over a longer period of retirement.
Provide more holistic wealth planning advice
This is an opportunity to consider broadening your practice to include other services, including estate planning, tax and decumulation strategies. This especially will be of value to older Canadians, who are increasingly making up a greater proportion of the total population. If your current or target client base includes many older clients, you may consider making this a key piece of your value proposition.
Show clients how you’re protecting them
Reassure your vulnerable clients that you understand their changing situation. Explain the benefit to them of identifying a trusted contact person. Also, get their agreement to let you place a temporary hold on any of their investment accounts to protect them in the event you suspect they’re being financially exploited.
Build a relationship with the trusted contact person
While the CSA suggests that the trusted contact person would “ideally” not have an interest in the client’s account, it’s nevertheless likely that many clients will identify a family member for that role. It’s always a good idea to get to know family members so you can gain a better understanding of a client’s wishes and needs. This will also help you start to develop a relationship with the family member, which could lead to future opportunities.