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Spotting signs of diminished capacity in seniors

By Darla Mercado

September 23, 2008 9:09 am ET

Regulators and members of the broker-dealer industry today divulged practices to prepare for diminished capacity in older clients at the SEC’s third annual Senior Summit in Washington.

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The panel, “Diminished Capacity: What Every Financial Services Professional Should Know,” highlighted red flags for advisers and registered reps who are working with older clients.

One’s ability to manage money is the first skill to diminish when clients undergo diminished capacity, noted Dr. Jason Karlawish, associate professor of medicine and medical ethics, University of Pennsylvania medical school.

Transactional services, in which clients buy products, present more problems, as the adviser needs to be sure that the client has the capacity to understand the contracts and complete legal transactions, he added.

Participants urged advisers and reps to become familiar, not only to signs that clients aren’t as sharp as they once were, but with their state’s guardianship laws, as definitions of “incapacity” vary from one state to another, observed Charles Sabatino, director of the American Bar Association’s commission on law and aging.

The American Bar Association is based in Washington.

Advisers must take heed: If a client meets the standards of incapacity, he or she may need to have a trusted family member make financial decisions, Mr. Sabatino said.

Broker-dealers are on the front lines of spotting elder financial abuse and diminished capacity, said Michelle Bryan Oroschakoff, managing director and co-chief compliance officer at Morgan Stanley in New York.

She shared the firm’s a set of best practices with those in attendance.

Morgan Stanley has a task force for senior investors and implements training services for brokers to help them recognize possible diminished capacity.

Suspicious signs include repeated orders, disorientation, and in the case of financial elder abuse, cashing checks without authorization and forged signatures.

Questionable transactions, such as certain annuity purchases for older clients, may also be flagged and blocked by the company’s system, she said.

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