Client advocates

J. David Lewis knows from interacting with his own mother that people with mental impairment can still pull themselves together quite well for an hour-long meeting with their financial adviser. That is one reason it can be such a challenge for advisers to identify signs of mild cognitive impairment, which can be an early sign of dementia. There are also a lot of emotions and denial involved when dealing with these issues, said Mr. Lewis, himself an adviser. But advisers need to be alert to mental decline before it can sabotage a client's nest egg and threaten the source of retirement income on which elderly clients depend. “Somebody has to be brave enough to say, OK, this is the circumstance,” Mr. Lewis said. “We have to deal with it and understand that it is not a matter of disrespect at all; it's just the way the facts are now.” Mr. Lewis addresses the issue proactively with his clients. During one of their early meetings, he asks them to sign a “recommendations report” indicating the people with whom he can communicate about their financial matters. Mr. Lewis also regularly asks his aging clients to allow him to send their children copies of their quarterly statements to keep them briefed on their financial situation. “We are not doctors that can diagnose these things,” he said. “About the best we can do is to let someone else know if we see some kind of transaction that looks off-kilter or clients are calling and asking the same things again and again.” Like Mr. Lewis, other advisers are increasingly reaching out to clients to ask them to name an advocate or someone to whom the adviser can turn for help if he or she believes that the client may be losing cognitive abilities and making unwise financial decisions. Michael Finke, a professor at Texas Tech University, was part of a research team in 2011 which found that the ability of people to make sound financial decisions at 60 and beyond declines with age, even if they don't suffer from dementia. Even worse, the confidence that older individuals have in their abilities remains the same, Mr. Finke said during a recent Retirement Income Industry Association webcast.

LEGAL REASONS

Research suggests that about 21% of people in their 70s suffer from cognitive impairment, 53% in their 80s and 76% in their 90s. It can be hard for advisers to identify warning signs, but there may be increasing legal reasons to address mental decline as the nation pushes harder to try to stop elder financial abuse. Last year, an independent insurance salesman in California was sent to jail for 90 days after being convicted on a felony-theft charge for selling a complicated indexed annuity to an 83-year-old woman who prosecutors said showed signs of dementia. Advisers should have someone to whom they can turn when, say, a client wants to send $800,000 to their hairdresser or invest in a new llama-raising business. Carolyn McClanahan, an adviser and physician, said a few years ago, she started asking clients to name someone with whom she can talk if she became concerned that the client may be making poor financial decisions. It's especially important with single clients because they don't have a spouse to whom the adviser can talk, Ms. McClanahan said. She makes sure clients sign such an agreement by the time they are in their late 50s or 60s — before any signs of cognitive impairment, she said. “If you have a client who is starting to have capability issues and you're selling them products, that's not a good thing,” said Ms. McClanahan, who doesn't sell products herself. “I see clients all the time who are presented with things that they don't understand [and who] may be taken advantage of.” Warren Ward, an adviser with an eponymous firm, said his aging clients are a concern. His firm recently replaced its informal approach to handling such clients and instead is using a system that MarketPsych LLC developed to identify when a client may be starting to suffer from impairment. “We would never try to make a diagnosis, but we do hope that using this process will let us more accurately document the deterioration of someone's faculties,” Mr. Ward said. MarketPsych instructs advisers to review certain factors each year for clients over 65 — earlier for those with dementia in their family history. The checklist asks whether the client has had any memory problems, any drastic personality changes, increased trouble with simple calculations or an inability to recognize familiar people or places.

KEEP GOOD NOTES

Advisers should make notes in the client's file each year to show they went through the checklist, MarketPsych managing director Richard Peterson said. If there's a pattern of increasing incapacity, a family member should be told and a doctor's evaluation recommended, said Mr. Peterson, who is a physician and a financial adviser. Adviser Derek Tharp of Mote Wealth Management LLC said it's important to have the conversation about who is allowed to help out with financial decisions while a person is of stable mind “and is not going to take any offense.” A client who is mentally slipping could have a strong emotional reaction to such a conversation. He asks clients to sign one-page directives that state with whom they want him to communicate about their finances should something happen to their physical or mental condition. “That way, it's on record, so if it came down to an issue with confidentiality, we could show that this is what has been agreed to,” Mr. Tharp said.