Financial advisors have an obligation to determine if a client is mentally capable to give them instructions, with the result that “knowing your client” might well take on new meaning as more Canadians age and the chances of them having some form of dementia increases.
“The relationship between a financial advisor and a client is similar to a lawyer-client relationship and any service provider and a client,” says Judith Wahl, a lawyer and executive director of the Advocacy Centre for the Elderly in Toronto. “So if you think of financial advisors as service providers, you can only have a legal contract if both parties are capable.”
Advisors, like family, need to be on the alert for red flags that may lead them to believe that their client may no longer be able to make financial decisions, says Wahl.
But Wahl says grey hair and a frail body do not immediately denote a person has dementia. “Some people are ageist,” she says. “Don’t make assumptions.”
Figures from Baycrest Health Sciences indicate the number of seniors is expected to double to more than 10 million in the next two decades with those living with dementia also expected to double to 1.4 million by 2031. Dementia is the leading cause of disability among Canadian seniors and costs the national economy $33 billion.
There have been instances reported of elderly clients suddenly and inexplicably cancelling life insurance policies that they have held for years, or removing large amounts of money from their bank accounts. Unscrupulous businesses or individuals, including family members, have taken advantage of many elderly people who were easily bullied or convinced because they had dementia.
Wahl says everyone in financial services and especially financial advisors need to be aware of how the whole competency field works – such as when the power of attorney kicks in and how it affects the client. They also have to be aware of when they should take instructions from the power of attorney and when from the client.
Technically, there is no such thing as diminished capacity – a person is either capable or not, says Wahl. If there is a court order and “a guardian of property” is assigned, the advisor would have to deal with the guardian.
Otherwise, a person is capable unless there are signs that point otherwise. Wahl says the big clues are if the person lacks the ability to make a decision or to appreciate the consequences of what they are doing.
Allan Dorfman agrees. About 70% of his clients at MTA Financial in Markham, Ontario, are 75 or older. Dorfman says his biggest problem is recognizing whether a client indeed has early signs of dementia. “People can be suffering from dementia and many other illnesses and can be pretty good at hiding it.”
Typically, he says, he and other advisors who deal with seniors ask their clients a number of questions designed to assess whether the client really understands the significance of what the advisor is talking about. Sometimes he asks the same question in multiple ways to see what kind of response he gets. “And because we’ve dealt with these clients for a long time we’re looking for some kind of unusual activity, trying to do something that we believe doesn’t make sense in their circumstances.”
At Dorfman’s office, advisors have known their clients for many years, listening to their clients talk for hours about their hopes and dreams and what they want to do with their money in retirement and in their estates. “So if we had never heard over the years from a client that they want to travel and then all of a sudden they’re cashing in $250,000 because they wanted to travel, that would certainly raise some flags.”
Out of character
But Wahl tells a story of a mentally capable woman in her 80s who had a small amount of savings and wanted to go on safari to Africa and fulfil a lifelong dream. But her children, who had never heard their mother talk about such a trip, thought this was so out of place that they started to apply to have her declared incapable. The woman managed to go on her trip before her children received a court order.
“So people can make decisions that are out of character, but what the financial advisor should be exploring is why they [clients] are making that decision now or determine whether the person is not showing evidence that they understand,” says Wahl. “It’s really how you have the exchange with a person. People who have lost capacity often can mask it so they throw the questions back at people.
“I get clients to explain to me in their words what they think a power of attorney is – do they understand what the document is and do they appreciate the consequences of signing it? Then I can see if they really understand it.”
While some advisors suggest a power of attorney or family become part of the financial advice conversation when there is some sign of a capacity issue, Dorfman says that can often be a challenge.
“In many cases, the client does not want you to involve anyone else,” says Dorfman, noting advisors often hear things they don’t tell their own spouses. “We have many clients tell us not to contact a power of attorney or beneficiary because they don’t want them to know how much they are worth. That is particularly the case when we deal with [adult] children. We have many clients whose children don’t know what they’re worth.”
Some parents are concerned that if their adult children discover their parents’ worth, they will start asking them to give them the money now, rather than leave it to them when they pass away. Many children in their 60s are still in debt, says Dorfman, and they see their parent’s money as a way to get out of the hole.
Sometimes clients have been so determined to not involve a beneficiary or power of attorney that they have transferred their accounts to a different advisor who doesn’t know about their situation, says Dorfman.
There are also times when clients have outlived all their relatives and don’t even have a power of attorney, he adds. As well, his office has dealt with instances when there is some question as to whether the power of attorney will be acting in the best interests of the client. He cites one incident in which a power of attorney sold the client’s house, moved the client into his house and then used the money to pay off his own house.
Having said that, Dorfman said his company reviews wills and powers of attorney every year because there are some estate and tax planning measures that can be made.
Wahl suggests one of the best ways to determine if a client is being financially abused is for advisors to talk with the client alone.
Wahl says financial advisors can raise the issue about powers of attorney with their clients, whether they are seniors or younger. Encourage clients to be part of the discussion of how they want to plan for a time when they may not be capable – but it’s not mandatory, she says.
Increasingly, virtually all financial advisors will have to become attuned to the issues of incapacity and dementia, says Wahl.
“Understanding this will make them good financial advisors,” she says. “Good people do a good job at it.”