Working with clients with de-clining mental capacity is a delicate business that requires sensitivity and patience. It can also leave a financial advisor negotiating a legal minefield. If advisors don’t proceed with caution, they may find themselves under fire from the client, the client’s attorney and beneficiaries, and the regulators, notes Ian Callaway, an insurance analyst in Vancouver: “We need to become more defence-oriented than we were in the past.”

With an aging population and increasingly vigilant regulators, this is not a situation most advisors will be able to avoid in their practices. Rising public awareness is also bringing the issue to the fore in ways that advi-sors need to be aware of. In September, the Toronto-based Ombudsman for Banking Services and Investments announced that it will be stepping up its oversight when it comes to tracking complaints against financial services institutions that involve dementia.

The OBSI initiative may well reveal a striking rise in incidents involving bank customers who have been taken advantage of due to their declining capacity. OBSI has already indicated that its staff has noticed a marked increase in dementia-related complaints. As well, a report published last year by the Alzheimer Society of Canada estimated that the number of Canadians suffering from dementia will more than double over the next 30 years to 1.125 million from about the 480,600 who are currently afflicted.

“Age is the biggest risk for dementia,” says David Harvey, chief member services officer in Toronto with the Alzheimer Society of Ontario. “When an advisor’s clients reach, say, age 70, [the advisor] should be sensitive to changes in the client’s behaviour patterns. Is the client attending to his business, opening his mail, replying to the advisor’s queries? Is he giving instructions that are radically different, such as asking for large sums of money, or does he want to change the beneficiaries in his will?”

A change in behaviour patterns, Harvey says, could indicate a health condition, not necessarily dementia, that requires attention. And requests to redeem assets and change beneficiaries can also be a sign of elder abuse.

Advisors need to anticipate the risks of working with clients who are losing their mental abilities well before these situations occur, says lawyer Ellen Bessner, partner at Cassels Brock & Blackwell LLP in Toronto and the author of Advisor at Risk: A Road Map to Protecting Your Business. “Make sure all your clients have power of attorney documents for both financial and personal care in place,” she says. “And they need to be reviewed every few years to see if they are still appropriate.”

If the individual who has been designated as your client’s attorney is not someone you know, Bessner suggests asking to meet this person: “You can say, ‘I don’t want to meet your niece Patty for the first time when you’re not able to give instructions’.”

Diane Kirkland, an advisor with Edward Jones in Pitt Meadows, B.C., whose client base is mostly over the age of 55, invites new clients to bring the person they’ve designated as their attorney to a client/advisor meeting. “And if, down the road, that client shows signs of no longer being capable of giving instructions,” she adds, “I’ll express my concerns to the attorney in private.”

Barry Fish, an estate lawyer with Fish & Associates in Thornhill, Ont., says that if a new client comes to you with a will and POA documents already drawn up, consider having a lawyer review these documents. Most provinces, he notes, have two types of POA documents: those that become effective as soon as they are signed, and those that become effective by a triggering event, such as producing a doctor’s certification of mental incapacity. “Consider which type is best for your client,” he says.

Documents that require a triggering event can help safeguard your client from predatory relatives who want to control his or her assets. But some lawyers and advi-sors favour documents that assign powers immediately upon delivery — if they believe the client has chosen a trustworthy spouse or child as attorney. “Then, if the client becomes incapacitated,” Fish says, “the attorney can take charge right away instead of having to get proof of mental incapacity.

“A person in the early stages of mental incapacity often becomes extremely defensive, and it may be difficult to get him to see a doctor,” Fish adds. “This grey period could last a considerable time, and the client’s financial affairs will be in limbo. If you are super-cautious, you may not be able to liquidate a security before it loses value.”

Ric Langford, director of wealth services in Vancouver for Toronto-based Bank of Montreal’s British Columbia division of BMO Harris Private Banking, says he favours POA documents that become effective on delivery so that a trustworthy attorney can step in as soon as possible. But because Langford’s firm is a discretionary investment manager, he notes that it has the power to act on a client’s behalf while capacity is being determined. Says Langford: “We don’t have to ask him for buy or sell decisions.”

And keep in mind that a client afflicted with dementia may have capacity in some areas but not in others, Harvey says: “The person may not be able to manage his investments, but still be able to live on his own and manage a bank account. So, the POA for finances may need to be evoked, but not the powers for personal care.”@page_break@And even when the POAs have been evoked, your client may still have the right to manage his own affairs unless a court says otherwise, notes Christine Van Cauwenberghe, director of tax and estate planning with
Investors Group Financial Services Inc. in Winnipeg. “An advisor can find himself between a rock and a hard place if the client and the attorney are giving two different sets of instructions,” she says. “You can suggest that the attorney take steps — by going to court — to bar the client from giving instructions.”

When the POAs are enforced and the attorney is giving you instructions, Fish says, more of the responsibility for the client’s financial affairs shifts to you than when you were dealing directly with the client: “The attorney can always say he never claimed to be an investment expert.”

In some cases, an advisor may have concerns that the attorney does not have the client’s best interests at heart — or is downright untrustworthy. Faced with this situation, Van Cauwenberghe says, the advisor should contact his or her firm’s compliance department for further instructions. “But remember: for confidentiality reasons, you cannot talk to other members of the client’s family unless the client has given you written consent to contact other people,” she says. “You’re only permitted to speak to the person who holds the power of attorney.”

Langford notes that having your client designate two individuals with POA may help safeguard the client from an untrustworthy attorney. Callaway has all his clients sign a personal information authorization form that authorizes him to contact their other advisors, their family and their health-care providers if necessary.

The attorney may also want to implement changes in the way you are managing your client’s investments — and you may have to go along. “With an elderly client, we would typically be managing a conservative portfolio,” Langford says. “But the attorney may want to change the focus of the portfolio.”

The attorney could also decide to change investment-management firms, Langford adds, “Although it could be built into the POA document that the account will remain with the firm.”

A worst-case scenario, Fish says, “would be if you were asked to liquidate an asset and you refuse — and then it drops in price. You may be sued by the attorney, and the hidden threat is that you may also be sued by your client’s beneficiaries.”

Callaway adds that advisors can also be vulnerable to mistakes made by the company that manufactures a financial product. A few weeks ago, he discovered an error in the application form an insurance company had sent him on behalf of his client. “If a claim came in 15 years down the road, when staff had turned over at that insurer,” he says, “the company would probably void the policy, and the courts would probably rule that I should have caught the error at the outset. Fortunately, I read the form to verify that what was being applied for was, in fact, what was being issued.”

Harvey notes that all provinces have legislation regarding mental capacity, and provide ways to have a POA overturned and reassigned to someone else. In Ontario, advisors who have concerns about the trustworthiness of an attorney can apply to the province’s Consent and Capacity Board: However, this can take time, during which a bad attorney can wreak havoc on the client’s portfolio.

A client will often want his or her own advisor to manage an elderly parent’s portfolio. If your client holds a parent’s POA and/or is a beneficiary of the parent’s will, this may result in conflicts of interest. “Before taking on the account, the advisor needs to determine if there is any potential for conflicts,” Bessner says. “The advisor needs to remember that he will have a duty to act in the best interests of the elderly client; and if that person is mentally incapacitated, it will be a fiduciary duty.”

There is nothing specific in Canadian law that requires an advisor to put a client’s interests ahead of his own, and courts decide on a case-by-case basis whether a fiduciary duty exists. But they have generally found that fiduciary duties exist in client/advisor relationships in which elements of trust, confidence, vulnerability and reliance on skill, knowledge and advice are present.

“Managed well, working for both a client and his elderly parent can be fine,” Bessner says. “But you’ll have to warn your client there may come a time when you’ll say a trade is not in the best interests of the elderly person. If the child says, ‘I understand,’ make a note of it.”

Indeed, documentation is key to working with clients who are losing or have lost their mental abilities. “Paper your file,” Van Cauwenberghe says, “when clients start to make decisions you don’t agree with, such as wanting to redeem funds. And if the attorney wants to redeem your client’s funds, you’d better paper that.”

Document every phone call, Callaway adds: “The one you don’t document may come back to bite you. And every time you meet a client, assess their physical appearance, and their mental and emotional state, and write a note about it for the file.”

Langford suggests advisors get training to deal with these issues.

Fish agrees: “If an advisor does all the right things, papers the file, questions anything that’s not in the best interest of the client, and keeps in mind the client’s possible longevity, he should have a decent defence in the event of an attack from the attorney or the client’s beneficiaries.” IE