How Advisors Can Fight Elder Financial Abuse

Unfortunately, many clients experiencing cognitive decline have difficulty retaining new information, and there is little advisors can do to protect clients after they have left the office. This is especially true when the client is dependent on the abuser for care or even for basic companionship.

Taking Action

In a new research paper on elder financial abuse, Stanford Center for Longevity researcher Marguerite DeLiema argues that financial professionals are uniquely positioned to recognize evidence of financial exploitation. But to do their jobs, there needs to be a professional and legal environment that encourages protection of older clients. In particular, laws must allow advisors to alert potential caregivers or adult protective services when they see evidence of financial abuse without having to worry about violating a client’s privacy.

The issue of client autonomy and privacy is central to the problems with today’s regulatory environment. In theory, the advisor’s job is to do what the client wants them to do — the advisor is the agent and the client is the principal. But what if the 65-year old version of the client wants the advisor to help the client preserve wealth into old age and pass assets on to loved ones, while the 90-year old version of the client wants to give money to a new acquaintance and has been convinced to write family members out of a will? Which client does the advisor serve?

States may now mandate that financial advisors report financial abuse when it occurs. Reporting, however, may not be enough if adult protective services are understaffed or ineffective. An important complication is the 1999 Graham-Leach-Bliley Act (GLBA), which allows individuals to prevent a financial institution from contacting a third party about a client.

Many point to financial privacy concerns as a reason for not contacting a relative when an advisor suspects financial abuse. DeLiema, however, points out that the GLBA specifically allows firms to opt out of privacy laws if reporting provides protection “against or to prevent actual or potential fraud, unauthorized transactions, claims, or other liability.” Missouri became the first state to pass legislation that explicitly offers safe harbor for financial firms that contact a third party, and many in the industry are working toward creating reporting standards that protect financial advisors against legal risk from reporting abuse.

In 25 states including California and Texas, advisors are required to report suspected financial abuse to local adult protective services. An equal number of states, such as New York, don’t mandate any reporting by a financial professional who suspects abuse. Lack of consistent reporting standards among states adds to confusion about when an advisor is required to report suspicious activity.

One solution is to create a plan for client incapacity. An advisor and a client should view retirement as a journey that may eventually encounter rough seas in the form of cognitive decline. A client may choose to tie himself to the mast and hand the rudder over to a fiduciary advisor or caregiver if the advisor sees evidence that the client is steering in the wrong direction. It is far easier to plan for financial incapacity than it is to deal with the consequences (or to change course once a client no longer has the ability to recognize when they have become a target for abuse).

After facing the dilemma with his 85-year old client and her suddenly friendly neighbor, Mike Haubrich decided that he needed to develop a plan for client mental incapacity. He now mandates that all clients have a conversation with their loved ones to create a game plan for dealing with aging and long-term care. This “caring hearts conversation” involves meeting with clients and their families to assess values, attitudes and beliefs toward long-term care. In many cases, clients have expectations that don’t always match up with reality.

These conversations can also shed light on which family members are least suited to provide long-term care (abusers are often male and have a history of substance abuse). Often, during a family conversation, these potential problem children recognize that they’re not well suited to provide care — but if the conversation had never occurred they may be tempted to step in and provide care when a client becomes vulnerable. Creating a plan ahead of time can actually reduce the likelihood that a family will be broken apart by opportunistic caregiving.

Most importantly, the plan provides advisors with a roadmap when they suspect abuse. In the case of Haubrich’s 85-year old widow, Haubrich was able to contact the client’s niece to make her aware of the potentially abusive neighbor. Despite the protest of his client, Haubrich had a signed incapacity agreement that allowed him to make the phone call in order to protect his client’s financial well-being.

“I showed it to her and explained gently that we did this years ago to protect her and that is what Norm (her late husband) would have wanted,” notes Haubrich. “Initially, she was a little upset, but she came to understand and I was able to get her niece involved.”

“The happy part of this story is that she is doing remarkably well in an assisted living center that is close by her niece Kathy who visits with her many times a week. Kathy now handles all Agnes’ affairs. I visited her last year and she is doing great. She has a beautiful apartment with daily activities and she even told me the food is pretty good. She occasionally bakes cookies and helps out other residents. It’s a great outcome.”

According to DeLiema, in the future these types of incapacity agreements will become standard in the financial services industry in order to give clients a way to protect against financial abuse. But today’s advisors need to start a conversation about incapacity as a necessary step in the retirement planning process.