When a senior client’s situation sparks suspicion

If you’re familiar with certain unscrupulous characters who wreck your senior client’s finances—the new best friend who worms her way into your client’s affairs, the shiftless son who exploits your client to invest in his startup, the polite young person on the phone who convinces your client to send money—you’re not alone.

When FAIR Canada and the Canadian Centre for Elder Law (CCEL) presented such case studies for discussion, industry participants confirmed they knew these players well, as indicated in the organizations’ 2017 report on vulnerable investors.

“I have every one of these cases,” says one advisor in the report. “And more and more of them.”

Regulatory guidance helps advisors deal with these situations—assuming firms take action. In 2016, IIROC recommended firms implement processes such as establishing a trusted contact person (TCP) and placing holds on accounts where financial abuse or diminished capacity is suspected.

However, adoption of IIROC’s recommendations has been “spotty at best,” says the FAIR and CCEL report on vulnerable investors. Industry participants consulted for the report said they would welcome a required conduct protocol, with one advisor saying a protocol would be “less risky than trying to figure it all out ourselves and doing it wrong.”

Regulators are increasingly working on protection initiatives. For example, the OSC, as part of its seniors strategy, plans to make TCPs a requirement and provide safe harbour to firms that contact TCPs or place temporary holds on accounts. It also wants to provide educational materials to firms.

A strategy update is expected in 2019; meanwhile, the commission says it expects firms and advisors to review and develop ways to improve their own practices with respect to older investors.

What’s an advisor to do?

Further guidance from regulators is welcome, says Todd Prendergast, vice-president, legal, at Assante Wealth Management in Toronto, referring to the OSC’s seniors strategy. He and Joseph Bajic, the firm’s CCO and vice-president of compliance, have been speaking to advisors about seniors issues for several years, and the firm has encouraged advisors to establish TCPs for about three years. Still, advisors have lots of questions, he says.

For example, clear guidance for contacting TCPs is needed so advisors aren’t left wondering if they’re out of line, especially where capacity is an issue, he says.

He also notes that appointing a TCP can be difficult when a client has no close family relationships, and those types of clients can be particularly vulnerable to abuse.

Bajic tells advisors not to fly solo when facing difficult situations with seniors. “You always can call the compliance and legal department to help you navigate through these situations,” he says. Prendergast adds that reaching out is often necessary to “talk through the facts.”

However, where there’s no conduct protocol and firm expertise, advisors’ appeals to legal departments have mixed results, says the FAIR and CCEL report, because identifying the correct action isn’t always straightforward.

For example, third parties who attempt to control a client’s account without legal authority are often family and friends, including grown children. “It’s usually someone they know and trust,” says Laura Paglia, a partner at Borden Ladner Gervais in Toronto. Thus, clients might not perceive that person as detrimental to their financial well-being.

Also, advisors might be reticent to take action, because reporting to a TCP or placing an account hold are potential “liability events,” says John Fabello, a partner at Torys in Toronto.

That’s why legal safe harbour is necessary, Paglia says. Because family relationships are complicated and emotional, reasonable efforts should be recognized in any new guidance, she says—specifically, the standard of the reasonably prudent advisor or firm. “That’s the kind of safe harbour that the industry would like to see,” she says.

Where mental capacity is a potential factor, assessment may lie beyond the skill of advisors, so safe harbour should recognize advisors’ reasonable efforts to, for example, take a client’s instructions, she adds. This means using good judgment and common sense to ensure a client understands the information and potential consequences related to a trade.

Paglia also notes that people of different means have different needs. A high-net-worth client’s estate could be subject to multiple external pressures, while another client’s portfolio must cover basic needs, she says. When you add in factors such as greater lifestyle expectations, longer lives with associated healthcare costs, and fewer pension plans, financial services has its work cut out.

“The market is being looked to—really for the first time—to provide more solutions,” she says. Safe harbour would protect advisors where they make suitable recommendations that align with a client’s personal and financial situations.

Prendergast says safe harbour would be helpful in light of privacy laws. “How do you overcome the privacy issue while you’re trying to do the right thing for the client?” he asks. (The government must reform unclear privacy legislation regarding what financial abuse is and associated reporting exceptions, say investor advocates and regulators.) He suggests advisors meet with clients and TCPs to explain each person’s role.

Fabello also suggests advisors be proactive, engaging in difficult client conversations about retirement planning and mental capacity “early and often.” Advisors must overcome the fear that such conversations will insult longtime clients by suggesting they’re old, he says.

To broach these topics, Prendergast suggests advisors discuss the benefits of naming a power of attorney. Clients generally “appreciate the information, motivation and direction advisors can provide,” he says, adding that the best and easiest time for the discussion is at the first client meeting.

Individual responsibility is also a factor. Beyond regulation, clients are a key part of the advisory relationship, and therefore a key part of the solution, says Fabello. He adds that living wills or powers of attorney to deal with capacity issues are relatively common, so clients will likely have some familiarity with them.

While clients should be encouraged to establish powers of attorney, doing so doesn’t ensure fewer conflicts, says Prendergast. For example, multiple children serving jointly and severally as PoAs can result in conflicting instructions to advisors.

His point highlights that advisors will continue to face challenges despite evolving guidance—as will society at large as the proportion of seniors continues to grow. While there are no easy answers, says Paglia, recognition of the challenges is a positive step.

KYC gets some TLC

If your firm has a one-size-fits-all KYC form, it might be time for a makeover. In its seniors strategy, the OSC says knowing your clients means knowing them as they age. For example, firms should consider collecting KYC information specific to clients’ life stages, such as reaching age 71, when RRSPs must convert to RRIFs.

Of note, regulators and investor advocates don’t regard seniors as a homogenous, vulnerable group. For all clients, explicit KYC requirements are part of CSA’s proposed client-focused reforms to better understand clients and meet enhanced suitability.

Advocate recommendations

In a 2017 report that identifies risks faced by advisors and seniors, FAIR Canada and the Canadian Centre for Elder Law recommend a rule, not just guidance, to establish a trusted contact person, as FINRA instituted earlier this year. In the U.S., the measure wasn’t widely followed when it was guidance, says Marian Passmore, director of policy and COO at FAIR Canada. The report recommends four more measures to help advisors serve seniors: safe harbour, a conduct protocol, training, and familiarity with outside resources.

FAIR Canada has asked the MFDA to provide training on elder financial abuse and diminished capacity as part of its new continuing education requirements, says Passmore.

Advisors under investigation

In addition to diminished capacity and control of accounts by unauthorized third parties, John Fabello, a partner at Torys, notes two seniors’ issues that are routinely part of regulatory investigations: the use of higher-risk equities to boost client income, and investment objectives that benefit the estate instead of the client. Referring to the latter, he says, “Oftentimes, a retired person is not clear themselves on that issue, so it becomes very challenging for the advisor.” The MFDA has recently focused on advisors’ books, assessing suitability for seniors.

IIROC’s guidance on seniors says advisors must document their rationale to support a client’s time horizon and should be vigilant of seniors assuming too much risk in an effort to generate income. Further, advisors should identify conflicts where a client’s stated investment objectives are inconsistent.