As the client base advisors serve gets older, they may well find themselves with a client who exhibits signs of diminished capacity.
The Alzheimer’s Association found that in 2015, over 5 million people 65 or older had Alzheimer’s, or 11% of people in that age group. That increases to 32% for people 85 and older.
The question for investment advisors, then, is “how are you taking that into consideration as you’re meeting with that client, talking to them about investments? If you suspect diminished capacity, what’s your obligation to reach out and intervene with family members, or authorities if you suspect elder abuse?” according to Michelle Jacko, managing partner and CEO of Jacko Law Group.
Regulators recognize these risks and have stepped up efforts to protect older consumers from financial abuse.
FINRA started its push to protect senior investors in 2007, Jacko said, with FINRA Regulatory Notice 07-43, which urged firms to review and update their policies and procedures regarding sales practices, regulations and ethical practices in dealing with senior investors.
Last year, the Securities and Exchange Commission and FINRA released the results of the National Senior Investor Initiative, which examined 44 broker-dealers in 2013 and found firms were making “potentially unsuitable recommendations of variable annuities (34% of firms) and alternatives (14% of firms).
The Senior$afe training program, offered by the North American Securities Administrators Association, helps advisors spot behavioral changes associated with elder abuse, like lack of grooming, sadness or unusual account activity, and provides a guide to reporting channels. The Senior$afe Act, sponsored by Sen. Susan Collins, R-Maine, would protect certain advisors and firms from liability when they report suspected financial abuse.
Advisors should establish “reasonable policies and procedures” that take into account older clients’ unique needs, Jacko said.
Many advisors don’t have an “escalation plan” to help them respond to concerns of diminished capacity in a client, she said. “Is this something where the firm needs to intervene and talk to an emergency contact or a family member?”
The first step in an escalation plan should be to look at the investment advisory agreement, according to Jacko.
“What contract did that individual sign with the firm for servicing the account?” Jacko said. “If this is an egregious case where you say, ‘This person really just doesn’t remember or recall anything,’ do you have the ability to freeze the account until you can get further direction?”
The answer to that question could no, she said, if the language in the contract doesn’t allow an advisor to stop actively managing a client’s account.
She suggested advisors add a clause that specifically allows them to stop making new recommendations or rebalancing portfolios until the issue can be addressed. FINRA’s proposed Rule 2165 would allow firms to do just that.
As they read over the contract, advisors should ask themselves, “Could an investor take action against me because I’m not actively managing their account?” Jacko said. “That doesn’t mean you can’t continue holding those same investments,” but no new changes will be made.
Jacko suggested that advisors present a hypothetical scenario in the account opening phase with a new client to ask them about who should be contacted if they show signs of diminished capacity. That contact might not always be the person an advisor expects.
“Some consumers have dysfunctional family relationships,” she said. “You would normally think about reaching out to a son, daughter, obviously their spouse, but there are some circumstances where the consumer trusts a different individual. It could be a friend, an attorney, an accountant.”
FINRA has also proposed amending Rule 4512 to require financial professionals to make reasonable efforts to identify a trusted contact for a client’s account.
Advisors must learn the signs of cognitive decline and train their staff to do so as well. “Typically the financial advisor does not have a medical background. We’re not asking advisors to make those medical determinations, but the question is, what are some of the most common signs of cognitive decline or elder abuse?”
If advisors ultimately decide to reach out to a family member or emergency contact, they may find themselves fielding questions about what to do next, Jacko said. “It’s helpful to have a list of different potential interventions for that family member to take, such as getting a health care proxy or engaging a care manager.”
– Read “Your Clients’ Most Vulnerable Organ” on ThinkAdvisor.