Seniors typically make up the biggest segment of most financial advisors’ client base, as well as the lion’s share of the wealth they manage. But serving this lucrative age group comes with its own set of risks and responsibilities.
The burgeoning silver-haired demographic is becoming increasingly vulnerable to financial exploitation. Many seniors become less mentally competent and exposed more often to predators.
Financial abuse of elderly clients can come in a multitude of guises. Clients with a financial nest egg may find themselves the prey of needy friends and relatives, greedy acquaintances, health-care and property maintenance providers or strangers who contact these clients by phone or email.
Declining mental acuity may make them forgetful or impair their judgment, resulting in poor financial decisions that can erode their wealth – even without a malicious third party.
“Seniors are vulnerable, and advisors play a role in monitoring that,” says Sterling Rempel, president and certified financial planner with Future Values Estate & Financial Planning in Calgary. “Firms need to have a protocol on what steps to take when signs of trouble appear.”
Protecting your elderly clients from relatives or outsiders who don’t have the clients’ best interests at heart will increasingly become part of your role as an advisor. You are in a position to identify abuse or declining cognitive function, thanks to your in-depth knowledge of your clients’ financial affairs and the regular contact you have with them. Often, these relationships have been developed over many years, and you may spot a change or suspicious relationship before it becomes apparent to other family members.
The challenge is not only in identifying financial abuse, but in taking appropriate steps to help your clients without overstepping confidentiality or privacy boundaries.
– Keep accurate records
Decisions made by you and each of your clients about investments or estate matters may be questioned later by the client if his or her memory is failing. That is why you should document meetings with your clients with written summaries, including the rationale behind your recommendations. To add reinforcement, have your client sign off on these summaries or recommendations, or send a followup letter or email to the client that outlines the key points that were discussed.
Mental capacity is a sensitive issue. Advisors and regulators should not assume that advanced age always leads to incompetence. Stripping clients of their ability to make decisions or enacting rules that are based on age rather than ability can be demeaning and even detrimental to a senior’s confidence and mental health.
On the other hand, proving a client’s mental incapacity and seeking the appropriate interventions can be difficult, as capacity is not gauged by specific tests in the way that a driver’s test is used.
“There is the danger of ageism coming into play if the rules are different just because someone is a senior,” says Clay Gillespie, managing director of Rogers Group Financial Advisors Ltd. in Vancouver, who specializes in advising retirees. “Age is not necessarily the best determinant of competence.”
There also is a risk that an elderly client might threaten to move his or her account if you are reluctant to implement a transaction that appears suspicious or potentially damaging to your client. The client might move to another, less scrupulous advisor who will accommodate the client.
– Growing demographic
Senior issues will be of growing importance in the coming years. According to Statistics Canada, people over age 65 make up 16.1% of the population – that’s 5.8 million Canadians over age 65. That number is expected to double over the next 20 years.
In the U.S., the National Centre on Elder Abuse reports that incidents of significant financial exploitation have been identified at a rate of 41 per 1,000 seniors surveyed. Research shows family members were the most common perpetrators of financial exploitation of older adults (57.9%), followed by friends and neighbors (16.9%) and home-care aides (14.9%).
The Canadian financial services sector’s regulators and associations have acknowledged the importance of the threat of financial abuse of elders and are developing strategies to help identify and deal with these cases. For example, the Ontario Securities Commission has been holding discussions and roundtables with key groups that work directly with seniors’ groups in an effort to promote understanding of the related issues.
Many firms are taking steps to increase awareness of financial abuse by educating employees in how to identify signs of elder abuse and establishing a procedure for advisors to follow when abuse is suspected.
In 2014, the Investment Industry Association of Canada (IIAC) introduced a guidance report to protect senior clients. It determined that concerns and issues regarding senior clients must be incorporated into the “know your client” (KYC) documents in detail, and that suitability of recommendations is key. The report also made several recommendations for advisors.
You should maintain regular direct contact with senior clients to remain informed about changes in their financial needs, employment status, health and other life events, the report suggests.
You should talk to your elderly clients about having an emergency or alternative contact on file with your firm, such as a trusted family member or other individual whom you can contact if concerns arise.
The IIAC recommends that firms produce brochures and other materials to educate seniors about online security and host seminars on topics such as investment fraud.
The IIAC report lists a variety of “red flags” that might indicate a client is being subjected to abuse or undue influence by a third party. These include:
– The client gives power of attorney (POA) to someone who appears inappropriate to the advisor.
– The client indicates that he or she does not have control of or access to his or her own money.
– The client’s mailing address has been changed to an unfamiliar and unexplained address.
– The client becomes inaccessible to the advisor by direct contact.
– The advisor notices a sudden or unexplained change in the client’s transaction patterns.
– A new individual becomes involved in the client’s financial affairs.
When red flags arise, the report states, you should seek assistance from a supervisor, a compliance officer or legal experts within your firm. You also should seek guidance about when to contact a trusted family member of the client or the person who holds the client’s POA.
There may be times when your better judgment tells you that you should decline or delay a transaction or refuse to open an account; in such instances, you should know when and where to seek guidance. Your firm’s legal and compliance department can make a decision on whether a case needs to be delegated to authorities such as the police or a public guardian.
Last month, the Investment Funds Institute of Canada issued a checklist to help advisors protect aging clients from financial abuse. And the Investment Industry Regulatory Organization of Canada (IIROC) published further guidance on compliance and supervisory issues for firms that may arise in dealing with senior clients. IIROC has developed a webcast to help investment firms and advisors manage the challenges of an aging client base, as well as an educational webcast for seniors, on its website.
IIROC calls for firms to adopt specific policies concerning POAs, and suggests advisors ask senior clients about the existence and validity of a POA when the account is opened. Firms should watch for any red flags that arise during the creation or modification of a POA, particularly relating to the connection between the client and the designated “attorney.”
Gillespie considers the appointment of an appropriate POA to manage the client’s affairs to be “more important than the will.” The POA is the first contact for advisors if a client starts to show signs of mental decline, Gillespie says.
You can advise your clients about who might be an appropriate POA. While many clients may often favour a child, this choice can be inappropriate if the child is financially irresponsible. New friends or caregivers may be legitimate candidates, but could raise questions. Sometimes a professional or a trust company is a better choice.
The POA document can be drafted in various ways. Some POAs become effective once signed, while others kick in only if the client is declared mentally incompetent by a physician. There also is a “limited” POA, which can prohibit withdrawals from certain accounts. Most financial advisory firms have their legal experts review client POAs before an advisor can act upon them, and will keep a copy on file.
Having a detailed financial plan and a KYC document on file gives the advisory firm ammunition if the individual appointed as POA by the client decides to make moves that are not in the best interest of the client or are not aligned with documented objectives.
IIROC also emphasizes the importance of obtaining from the client the name and contact information of an emergency or “trusted contact person,” and getting written permission to contact this person in the case of concerns, including suspected financial exploitation or diminished capacity. This contact should be a person who is not involved in making financial decisions regarding the account.
“Our guidance stresses communication and escalation,” says Richard Corner, vice president and chief policy advisor, member regulation, with IIROC. “It’s dangerous for advisors simply to look out for a limited list of red flags – [advisors] are not mental health experts. If there is any behaviour that is out of character or perceived to be detrimental to the client’s interests, advisors need to know who within their firm to report their suspicions to.”
The investment dealer also should have procedures in place to put a temporary hold on a client’s account to allow time to verify it or instructions if there are concerns. In some cases, freezing an account may be advisable, but that usually requires legal process.
Todd Prendergast, vice president and legal counsel with Assante Wealth Management (Canada) Ltd. in Toronto, says educating advisors and clients on senior issues is a strategic priority at his firm. Advisors are encouraged to contact their compliance or legal department “the minute their spidey senses are up.
“If the concerns are legitimate,” he says, “we can determine the next step. We tell advisors not to go it alone. There is always someone in compliance or the legal department who can help. Our first message is: give us a call. It’s better to be proactive than reactive.”
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