Mental incapacity may threaten retirement

Despite all the news around retirement planning, there’s a lot more to discuss with your aging clients than their golden years. A major concern for many advisors and older investors is what happens when the client’s memory starts to fade.

“As a client gets older, they sometimes suffer from failure of memory and confusion, and that creates problems for the client and advisor,” says John Poyser, a member of the wealth and succession practice group with Winnipeg law firm Inkster Christie Hughes. Poyser spoke on the subject at The Knowledge Bureau’s Distinguished Advisor Conference last week. “It makes it difficult to work with that client, and it creates an environment where there can be great disagreement and conflict.”

To avoid a host of potential problems, it’s best if the advisor can determine the mental capacity of the client early on. That’s easier said than done, though — after all, advisors aren’t doctors. However, Poyser offers up a number of ways to figure out if something’s a little off with your client.

Simple indicators that suggest incapacity include not showing up for appointments, not understanding their assets, or another family member’s stepping in to give instructions on the client’s behalf.

“We’ve all dealt with individuals as they grow older, when they start to display shortfalls in their memory and general cognitive function,” says Poyser. “These should be signs or tip-offs.”

In the best-case scenario, trusted family members will be able to work with the advisor to best manage the client’s affairs, but this isn’t always the case.

In one situation that Mark Stefan, an advisor with RBC Dominion Securities, relayed at the conference, a woman was essentially stealing money from her incapacitated mother by taking control of her assets after the ailing senior was unable to care for herself.

Recognizing the potential problems early on, the advisor, who was not Stefan, tried to get the mother to protect her assets from the daughter. “The advisor was very particular with the client, making sure the right things were in order, but the client kept saying, ‘What do you want me to do? It’s my only daughter,'” says Stefan. “Of course the worst thing happens — there’s an illness, and the daughter has full authority over the mom’s affairs.”

The advisor suggested that the mother and daughter sign an agreement that says whatever the daughter takes should be considered a loan. “The mom says, ‘No, a verbal promise is fine with me,’ and then it begins.”

In less than two years, the daughter cleaned out nearly all of the mother’s money, leaving only a condo, which she was about to sell until her mother’s friend intervened. Stefan says the family friend ended up becoming the mother’s personal guardian, saving her from complete destitution. “In two years, this lady went from a comfortable situation to requiring government assistance to live.”

Stefan admits that it’s difficult to get elderly people thinking about the problems they could face as their mental capacity diminishes. “They might be in physically good health, but there’s the onset of Alzheimer’s,” he says. “So there are great risks, but people are not taking advice. Then all the questions come up: When does stewardship for an advisor begin? Where does it end? How do you protect a client and yourself before and after incapacity?”

Poyser, who also spoke at the DAC conference, takes a four-pronged approach to situations like these. He says advisors need to ask a lot of questions, take copious notes, buy time and bring in help.

The first point, asking questions, should be done as soon as you find out that your client might be suffering from mental capacity issues. Poyser says advisors should ask the client and his or her family heirs questions such as “Have you talked to an accountant?,” “There might be capital gains — have you considered that?,” “Did you talk to a lawyer? He might have something to say about the probate aspects of this.”

While asking the right questions is important, it’s note-taking that will save you and your company from litigation. “If someone gets sued or if this does turn into a predatory situation, notes are very important in terms of reporting back to the compliance officer,” says Poyser.

Buying time is essential because it gives the advisor a chance to create a plan of action and to bring in help, which is the last of Poyser’s four prongs.

He notes that bringing in help can take two different forms. The first is asking the client’s advisory team, like an accountant or lawyer, to help assess capacity issues, while the second type of help is asking your supervisor or compliance officer for advice. “One way or another, the advisor has to go to the compliance officer to cover his butt and the company’s butt,” says Poyser. “Then it’s not all on the advisor’s shoulder. You build a support network with the shop, and that protects the advisor and ensures better results for the client.”

Even after following all the proper protocols, a client’s family member might still be hell-bent on manipulating a parent’s money. In that case, it might be time to tell your client that you can’t represent him or her anymore. Of course, that’s a last resort, but it could be better for you and the firm if you let the client go before it’s too late.

“Some people will do that because they won’t want to be there watching, to say, ‘We rode shotgun along with a guy who destroyed himself and his family financially,'” says Poyser. “That’s bad press. Even if the advisor’s hands are tied, that might not be the way other people see it.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(11/13/07)