Seniors are a fast-growing demographic group in Canada. And throughout their long lives, they have accumulated assets that put them at the top of the wealth pyramid, compared with other age groups, according to Statistics Canada.
But serving the financial advisory needs of seniors can be complex, and fraught with risk for their financial advisors. Declining mental and physical capacity, estate and family-related issues – not to mention the new focus by regulators on this vulnerable group – raise a host of red flags.
That’s particularly so when it comes to the issues that trigger the majority of client complaints: the “know your client” (KYC) rules and suitability obligations.
Even a cursory review of recent decisions from courts and tribunals should be enough to alert advisors to the landmines that can accompany providing services to older clients. From unsuitably high-risk investing and inappropriate leverage to the abuse of powers of attorney (POAs), advisors have found themselves liable when elderly clients lost money after following an advisor’s advice.
“The recent cases really ought to have the advisor community on alert when dealing with seniors,” says Kelley McKinnon, a lawyer who formerly worked with the Ontario Securities Commission (OSC) and is now a partner with law firm Gowling Lafleur Henderson LLP in Toronto.
All this complaint activity has captured the attention of regulators. The federal Ombudsman for Banking and Services and Investments (OBSI) reports that 55%-60% of its complaints in 2014 involved people over the age of 60. At the Investment Industry Regulatory Organization of Canada (IIROC), more than 40% of prosecutions against registrants in 2013 related to misconduct involving seniors.
Seniors bring a number of issues to the table that advisors typically don’t encounter with most clients, says Jeremy Devereux, partner at Norton Rose Fulbright LLP in Toronto, who defends advisors in professional liability cases. These can range from mental and physical health to family dynamics and wills and estates. But perhaps the most important is the issue of mental capacity, which, at its most basic, Devereux says, is “the ability to understand what’s happening in their account.”
An OSC roundtable on seniors held last September identified important issues related to advising the elderly. These include lack of financial literacy; becomingly increasingly risk-averse; a greater need for liquidity; diminishing capacity in cognition, vision and hearing; the fear of change; and vulnerability to family members.
Devereux says regulators and courts “are looking at a heightened duty on advisors and a heightened duty on supervisors.” A common pitfall involving older clients is that advisors don’t update their clients’ objectives as they age, he adds, stressing the need to review accounts regularly.
Advisors may also fail to recognize changes in a client’s mental capacity as he or she ages. “The change can be very gradual,” Devereux says. Advisors should flag concerns regarding any such changes with the client, a relative and the firm’s compliance department. Look for forgetfulness, inattention and an unwillingness to make decisions.
Douglas Melville, OBSI’s CEO and ombudsman, says two key areas tend to trip up advisors who counsel seniors: KYC and “know your product” processes. Says Melville: “What the regulators are really concerned about is making sure there are no shortcuts taken with vulnerable citizens.”
KYC, he says, should be a full information-gathering process: “It’s about understanding circumstances and the needs of individuals.” But, too often, KYC falls short. Problems arise, he adds, as a result of a “disconnect between the information gathered and the type of investment recommended.”
Those issues are reflected in recent disciplinary cases and civil lawsuits. For example, Traian Moldovan and Robert Holmes, then of Canaccord Genuity Capital Corp., were suspended last April by IIROC for three years and fined $100,000. The options trading program run by these two advisors collapsed when the global financial crisis hit in 2008, devastating 37 of their clients (including 16 retirees) who lost a total of $6.6 million.
The British Columbia Supreme Court later awarded Marlin Investments Inc., one of Moldovan’s and Holmes’ clients, $212,000 for negligence. (Other claims were settled.) A cursory, “checklist” approach to the KYC documents figured prominently in the decision. Although Marlin was the holding company for Kenneth Marlin, a former mutual fund salesman, evidence showed that when he opened his accounts with Canaccord, his health was poor, he had vision problems, his memory was slipping and he was caring for an ailing wife. (See story, Investment Executive, Mid-October 2014.)
“New client” account forms (NCAFs) also were at the centre of a 2011 IIROC discipline case involving advisor Kenneth Gareau, who worked for Dundee Securities Corp. in Regina. Gareau placed two client couples – one a retired couple; the other, a couple in their 60s – into portfolios that were 100% equities. The NCAFs indicated that the clients’ goals were capital appreciation. When the markets collapsed, the clients lost a substantial part of their assets and complained.
An IIROC panel ruled that “the mere completion of the NCAFs and the providing of the information on each individual assessment does not remove the overall responsibility of [an advisor] to recommend suitable investments throughout the entire relationship of advisor/client.” The IIROC decision also notes that the fact the clients were seniors and that one had “very modest assets and very little investment experience … placed a very high responsibility on Mr. Gareau to act in their best interest.”
The panel concluded that this “duty is so high that even if either [of the clients] had instructed Mr. Gareau to create a totally inappropriate and unsuitable portfolio, he had a responsibility to warn them and to even protect them against themselves.”
What can advisors do to protect themselves from complaints from seniors? Melville stresses fully documenting a file and ensuring that there are adequate notes on investing decisions and discussions. List times, dates, decisions made, the genesis of the discussion and any warnings that have been provided, then follow up with each client in a dated letter.
It’s best, Melville adds, to use a system that provides a time stamp when the notes were made and doesn’t allow them to be changed or edited later. Emails and recordings are also valuable, he says.
Lawyer Harold Geller of Ottawa, who has both defended and sued advisors, adds: “Courts will look at your note-taking, particularly when dealing with somebody who has lost capacity. Note-taking has to be at the highest level.”
Comprehension and understanding was cited at the OSC roundtable as being a key issue with seniors. A person’s cognitive capacity diminishes over time and he or she becomes more reliant upon advisors; it’s key to appreciate that these clients may not admit to lack of understanding.
The OSC roundtable also urged that advisors be better educated about seniors. (See story, page 1.) Advisors should ask more generic, open-ended questions when seeking to develop an understanding about a client’s situation. Make sure the KYC process probes deeply, asking about issues such as the client’s health, care needs, a spouse’s interest in investment matters and the roles of family members in the decision-making process.
Be particularly wary of clients who come in with a POA for a senior, Geller warns. Don’t assume the POA is valid or that it is not being abused. Call on your firm’s compliance department for help.
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