How to protect clients with signs of cognitive impairment

This poses an immense challenge to the financial well-being of seniors, a growing segment of the population. It also poses a quandary for their investment advisors. Suppose you’re an advisor who begins to suspect a client’s mental capacity and judgment are deteriorating. What can you do, and to whom can you turn, in order to protect that client and his or her assets?

As a first step, you should notify your supervisor about the problem. Then, the two of you may wish to meet with the client to discuss the matter. It’s bound to be a difficult conversation, but it’s necessary. In some instances the talk may reveal that your concerns were unwarranted. In situations where that’s not the case, though, an action plan will be necessary. This will have two basic components: immediately stabilizing the client’s investments; and getting an appropriate outside party involved to handle the client’s financial affairs. Both components can be problematic.

Current laws and regulations let advisors refuse to execute inappropriate trading orders, but that isn’t particularly helpful if the account needs proactive attention and the client is non-responsive or his or her instructions merely reflect the fact that he or she has probably suffered a loss of capacity. If a position needs to be closed out immediately to avoid or mitigate a loss, there may be no way to do it.

Meanwhile, privacy laws constrain disclosure of information about the client’s financial affairs, so if there’s no joint account holder and the client didn’t sign a power of attorney (particularly one that expressly remains operative despite mental incapacity), a well-intentioned advisor may feel his or her only real option is to tip-toe up to the client’s family with a vague comment such as: “I’m a little worried about Fred’s memory. Maybe you should get him to see his doctor.”

But this is very unsatisfactory. The warning may be too ambiguous to convey the nature or urgency of Fred’s problem. Or the advisor might not know Fred’s family. Or Fred might be furious that the advisor approached them. Maybe Fred fears suffering financial abuse at the hands of his family. And maybe he has good reason to fear it and would have preferred getting a friend outside the family to help him.

We could avoid much of this angst and trouble by implementing a requirement that every client must designate a specified person to be contacted in the event that the advisor has concerns about the client’s mental capacity. This should be operative unless the client has signed a more general power of attorney (POA) for his or her account. It also should allow the designated person to give limited instructions on the client’s behalf for the execution of transactions urgently needed to stabilize the account.

These measures won’t work, however, unless advisors and their dealers are given a legal safe harbour. They must be confident that they won’t face lawsuits or disciplinary proceedings if they act on their concerns by notifying the designated person and if they carry out that person’s instructions in good faith. Legislation and regulation are needed to provide this zone of safety.

Until that’s done, you should urge your clients to consider granting power of attorney to a trusted loved one or friend. Doing so won’t deprive clients of control as they can revoke the POA or replace it at any time while they remain competent — and the POA can be tailored to become operative only if and when the client becomes incapacitated.

This is not something anyone really wants to think about. But it’s important that each of us do so and do it now — while we still can.