The advisor and his client, a woman who had recently retired, had together decided to develop a strategy to manage her retirement income. He delivered an application to her for a product pivotal to that strategy, but she subsequently told him the application had disappeared. Over the course of some weeks, he replaced the application several times. Each time, his client told him the application had again gone missing.

The client finally admitted that she thought her adult children were stealing the applications. It became clear to the advisor that the client’s family objected to her new plans, and that the woman was embroiled in a stressful family dispute. He wondered about her mental capacity because she couldn’t seem to resolve the situation on her own. Eventually, the advisor left this client.

“Everything got messy,” Arthur Fish, a partner in the Toronto office of Borden Ladner Gervais LLP, told a full house at the Independent Financial Brokers of Canada’s conference in October.

The advisor had tried to help his client, but he had concerns about the client’s children, Fish said. They could sue the advisor, either on behalf of their mom or themselves after her death, alleging that he had put his client in a product or a strategy that essentially left them nothing.

“Advisors want to do the right thing, but they don’t want to get sued,” Fish told conference participants. “That’s what it comes down to.”

A large wave of Canada’s population is moving into their senior years. According to Anne Soden, executive director of the National Institute of Law, Policy and Aging in Montreal, some of your clients will experience some form of short- or long-term mental incapacity that will affect their ability to make financial decisions.

“We don’t want to equate aging with incapacity, by any means,” says Soden, founder of the National Elder Law Section of the Canadian Bar Association, “but we have more people who are now living longer. The percentage doesn’t increase, but there are many more people in the percentage.”

Fish says that about 30% of his legal practice involves cases of mental incapacity that are brought to his attention by family members, fiduciaries such as advisors and institutions such as hospitals. He has focused his practice to a certain extent on the laws around mental incapacity, and says the increase in these cases has been exponential in recent years. “When I talk to colleagues who work with estates and trusts — desk and courtroom lawyers,” he says, “they’re all saying they’re seeing more and more of these files.”

Advisors are on the front lines when a client becomes mentally incapable, because they are handling the client’s finances and may be making decisions that will have an impact on the client’s financial well-being and on the well-being of the client’s family. “[Advisors] are involved with trigger points,” says Ian Hull, a partner at Hull & Hull LLP in Oakville, Ont. “They are often the first to hear about these things — and judges are going to start blaming advisors for sitting on their hands.”

Lawyers who understand the legal and moral issues around mental incapacity say incapacity often occurs out of the blue. They recommend two ways to safeguard a client’s financial interests and your practice.

“Good basic practices go a long way toward avoiding serious trouble,” says Fish. “The starting point is to incorporate estate planning and planning for mental incapacity into the services you offer clients.”

> Seek written consent from clients to discuss their affairs with family members and other professionals should the question of mental capacity become a concern. “If you speak to the family and you have not been invited to do so,” says Hull, “you may be creating confidentiality and privacy problems.”

Either speak to the client about your concerns and take notes or obtain written consent. “Nine times out of 10,” he adds, “[clients are] OK with that.”

Soden notes that if you have permission to speak with third parties, you may find it helpful to touch base with the client’s accountant or other financial professionals who may be able to tell you about any major changes in the client’s approach to his or her finances.

> Make sure your client grants a power of attorney for his or her personal property. A POA for personal property is a legal document that indicates the client has assigned authority to someone they trust, such as a relative, friend or lawyer to act on the client’s behalf on financial matters in the event the client becomes incapacitated. POA is often assigned in conjunction with a will, although that is not necessary.

@page_break@“Every adult should have this document,” says Fish. “It’s a standard item and part of estate planning.”

He also suggests advisors consider adding boilerplate questions about wills and POA to their standard client account-opening procedures, or they can incorporate them into their general practices on a given date.

“It may be easier to talk to clients about these matters when you tell them this is something you’re doing with all your clients,” Fish says. “It’s certainly appropriate to say to a client, ‘By the way, have you made a continuing power of attorney for property? How long ago? Who did you appoint? Does that still seem to be a good thing to you?’”

Soden, who works under the Civil Code of Quebec, notes that laws governing POA and legal language around it can vary significantly from province to province. In Quebec, for example, a client names a mandate — a person to make decisions on his or her behalf — but this process is not valid once the client becomes incapable. At that point, a court procedure is required.

“The process [must be] homologated,” says Soden. “It’s a kind of probate, and a vetting to see if someone will come forward to the court to contest the mandate.”

Often, the question of mental incapacity arises when the advisor notices that something appears to be wrong with the client. The advisor may be reluctant to do anything. “Nobody likes to get old,” Fish says. “You see your clients age, and you know you’re aging, too.”

But it’s important to move past this reaction. Advisors should ask their clients about their health. Most clients, he says, will appreciate the concern.

If the advisor has permission to speak with a family member or other professionals about the client’s financial matters, especially if the client is making decisions that seem “out of whack” with his or her previous approach, says Soden, you should do so at this point.

“Do you review the powers of attorney? Do you take up your client’s case with your compliance officer?” she asks. “Yes. These are checks and balances that maintain your concern for the client and, really, honour the client.”

If the client or a family member calls you, saying that someone will be exercising the client’s POA, you should ask to see the document and read it carefully.

“It may say the power becomes valid only if certain conditions are met,” says Fish. “If nobody has done anything to prove that these conditions have been met, the power cannot be acted upon.”

Often legal counsel is not necessary; but when conflicts do arise, which happens occasionally, it is best to seek legal help.

Your client may have appointed joint POAs, and these two people may have differing views on how your client’s finances should be handled.

In other cases, a client may simply not agree to enact a POA for property and the family may have to go to court to force a decision. It’s an advisor’s duty to act in the client’s best interest.

“In these circumstances,” Fish says, “it’s often less expensive to seek legal advice early than to finesse your way through the situation and ultimately have to hire a lawyer to fix it for you.” IE