Financial advisors have a fiduciary duty to their clients, meaning that they must take the client’s interests into account when making recommendations and acting on their behalf. Usually, fulfilling that duty involves listening to the client to understand their wishes and acting accordingly to ensure those wishes are carried out. However, the situation becomes more complicated if the advisor suspects that the client may have a diminished capacity to make sound financial decisions on their own.
When clients exhibit signs of cognitive decline, advisors must navigate a tricky tightrope of conflicting goals and obligations. On the one hand, an advisor’s desire to respect and uphold the client’s wishes (and their desire not to lose the client) may lead them to follow the client’s instructions at all times, even when the advisor might find them suspicious (e.g., if the client requests a large withdrawal to invest in the business of a ‘friend’ they’ve never mentioned before). But on the other hand, the advisor’s duties of care and loyalty, as well as a growing number of elder-abuse prevention laws enacted in many states, compel the advisor to intervene to prevent actions that could cause harm to the client and/or to notify authorities when they suspect the client is being exploited.
As life expectancies increase and the population ages, cognitive decline is unfortunately on the rise. It’s therefore a best practice for financial advisors – particularly those who serve retirees and elderly clients – to establish processes that enable them to recognize potential cognitive decline or exploitation when it occurs, and to handle those situations in a manner that meets their ethical and regulatory obligations. Having these processes in place before diminished capacity arises can ease the challenge of navigating situations where the advisor’s fiduciary duty may come in conflict with the client’s express wishes.
The process can start with training and education, for both advisors and clients, on the signs of cognitive decline and/or financial exploitation. Ensuring that the client is aware of the risk of fraud and abuse as they age can help reassure the client that the advisor is proactively involved in protecting their interests and create awareness that the advisor will act if they suspect abuse is occurring. Advisors can also ask their clients to name a ‘trusted contact’ who can be involved if the advisor observes concerning behavior or is unable to reach the client (and having the contact authorized by the client in advance can help the advisor avoid breaching any privacy laws if they later feel the need to engage a third party in the conversation).
When an advisor notices signs of cognitive decline or abuse, they aren’t expected to make a medical diagnosis. Instead, they can note (and document) instances where the client’s behavior or desires are inconsistent with their past behavior and emphasize their desire to protect the client’s interests. State laws often grant advisors the authority to delay requested disbursements of funds in cases of suspected fraud, providing the advisor with additional time to investigate and discuss the situation with the client. And even though the client may push back, keeping the emphasis on the actions rather than the client’s behavior – e.g., noting that the client’s actions appear unusual based on their past behavior and that firm policy requires further review in such cases to protect client assets – affirms that the advisor’s primary concern is on acting in the client’s best interest, rather than confronting the client about their cognitive ability.
Ultimately, while it’s challenging to face clients experiencing cognitive decline – especially in deep and long-lasting client relationships – advisors have a critical role to play in ensuring that decline doesn’t lead to abuse, fraud, and/or loss of the client’s savings. By proactively putting procedures in place to prepare for, detect, and handle such situations as they arise, advisors can fulfill their legal and ethical duties – but more importantly, safeguard their clients’ assets when the client is no longer able to do so themselves.Read More…
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