Diminished capacity talk with a client requires active listening, empathy

Perhaps the most difficult conversation a financial adviser is likely to have with a client won’t involve asset allocations or retirement planning. It will center on the client’s mental capacity.  

The talk can be awkward or tense, even if the client is in perfect mental health when the adviser brings up the subject. The delicate situation requires that advisers try to understand what their client is going through.

“Listen and just show some empathy,” Chris Heye, chief executive and founder of Whealthcare Planning Inc., said Tuesday at the InvestmentNews Retirement Income Summit in Naples, Florida. “How would you want your mother to be treated? Treat your client that way.”

Advisers should take care with the language they use when talking to clients about diminished capacity. In fact, they should avoid the term “diminished capacity” and use the phrase “less able,” said Thomas West, senior partner at Signature Estate & Investment Advisors.

Advisers also shouldn't overwhelm their clients with facts and data about dementia and elder financial abuse, experts said. Instead, they should try to relate to them by talking about their own experiences with a loved one whose mental health was declining or asking the client whether they have had similar experiences with a family member or friend.

“People think in terms of stories, not statistics,” West said.

Building a rapport with clients is crucial to getting them to talk about steps that may be needed to protect their investment accounts from people who may want to take exploit them.

“Communication is key,” Heye said.

Ryan Bertrand, vice president and managing director for advanced markets at Transamerica, encouraged advisers to bring up mental capacity sooner rather than later. Don’t wait until clients reach their senior years.

“Pick an age to have a conversation with clients around this [issue],” Bertrand said. “You’ve already prepared them for it.”

Over the last several years, securities regulators have put in place rules that give advisers latitude to take action when they see potential exploitation.

In 2016, the North American Securities Administrators Association adopted a model rule to protect vulnerable adults. Enacted by 32 states, the measure — which applies to broker-dealers and investment advisers — includes mandatory reporting of suspected abuse and provides a safe harbor for brokers and advisers to withhold disbursements from accounts of clients who may be victims. The Financial Industry Regulatory Authority Inc. adopted a similar rule for brokerages it oversees.

Michele Kryger, head of the AIG elder and vulnerable client care unit, would like to see changes to the rules. For instance, she said the 15-day hold on disbursements from a client account, which can be extended another 10 days under some circumstances, is not long enough to investigate possible abuse.

“Listen to us firms on the types of cases and challenges we’re having,” she said. “Extend the time frame for delays to disbursement.”

Kryger also said there should be more coordination between state agencies and regulators on protecting seniors.

Exploitation may get worse. Older investors generally have the most money they ever will in their life but they're also at the point where they’re dealing with diminished mental faculties.

“The two trends are going in the wrong direction,” Heye said.