As the number of older Americans continues to climb, investment advisors face a a critical challenge — how to take care of clients experiencing diminished capacity or financial exploitation without subjecting themselves to legal liability. This article presents a roadmap to help advisors do just that by discussing, among other things, the critical elements of early planning, tools to address privacy concerns, helpful contractual protections, identification of red flags, and measures to take once red flags are identified.
One of the best prophylactic measures an advisor can take to minimize the risks associated with diminished capacity and financial exploitation is to directly address such issues with the client at the beginning of the relationship. As difficult as it may be, clients should be urged to think and talk about how they want their financial affairs handled should they face cognitive impairment in the future (e.g., do they want a springing power of attorney or health care proxy?)
A client and the advisor both benefit if the advisor encourages the client to bring family members and other professional advisors into these conversations at an early stage as this allows the advisor to gather information about family dynamics and existing estate planning measures as well as to ensure that everyone is on the same page. If the client already has estate planning documents in place, an advisor can request those documents from the client so that, if the client becomes cognitively impaired or faces financial exploitation in the future, the advisor has someone to turn to that has authority to take action with respect to the client’s affairs. Of course, the advisor should revisit these conversations (and documents) with the client periodically to ensure that nothing has changed with respect to such arrangements.
Addressing Privacy Concerns
Confidentiality obligations owed to a client often preclude an advisor from turning to a client’s loved ones when the advisor suspects that the client is experiencing diminished capacity or financial exploitation. As such, to avoid breaching privacy laws (such as Regulation S-P under the Gramm-Leach-Bliley Act), an advisor should, at the outset of the client relationship, ask its clients to designate an authorized contact person (e.g., a family member or professional advisor) to whom the advisor can turn to should the adviser become concerned about the client in the future. The client can authorize the adviser to discuss the client’s financial affairs with the authorized contact person and, if the client is comfortable, take instruction from the authorized contact person.
This designation can be included in the advisory agreement between the client and the advisor. Advisors should periodically revisit the designation to ensure that the authorized contact person continues to have a strong relationship with the client. An advisor can also obtain client consent at the outset of the client relationship to notify government authorities should the advisor suspect that the client has become the victim of financial exploitation.