Advisers unable to meet fiduciary obligation to clients with reduced capacity; 'document, document, document'
It's not an easy conversation to have, but financial advisers need to talk to their clients about Alzheimer's disease and other forms of dementia and the impact it can have on their financial circumstances.
“The first conversation is difficult, but after you have it, you can actually develop stickier relationships with your clients,” said Brian Parker, managing director of EP Wealth Advisors Inc. “It gives you a chance to talk about future risks.”
The risks aren't only to the clients. Financial advisers providing recommendations and financial advice to clients suffering from some form of diminished mental capacity are vulnerable to lawsuits and enforcement actions that can destroy their practices.
“You can't meet your fiduciary obligations if the client's behavior suggests they have reduced capacity,” said Hollie Mason, an associate counsel for TD Ameritrade Inc. “The bottom line is if a client hasn't provided someone to talk to that has the power to act on their behalf, an adviser may have to determine not to continue making investment recommendations for the client.”
According to the Alzheimer's Association, 5.4 million Americans have the disease and roughly 50% of Americans will develop dementia in their lifetime. Currently one in eight people over the age of 65 and 43% of Americans over the age of 85 suffer from it. With the baby boomers now entering retirement, the numbers will grow dramatically.
For financial advisers, the possibility that a client has dementia raises two major issues. First, is the cost. According to Mr. Parker, the estimated cost of care of a person with Alzheimer's over a typical six- to eight-year course of the disease can be between $600,000 and $800,000. The disease is a life-changing event that will necessarily affect asset allocation decisions for all but the wealthiest clients.
The second issue is legal risk. Ms. Mason suggests advisers proceed with extreme caution when it comes to clients who may have dementia. “When you suspect a capacity issue, it's not the time to get them to sign up for an estate plan,” she said.
In fact, it's not the time to recommend any new investments or strategies to the client. “When you start to have concerns, go to Plan B and manage your risk.” Ms. Mason said the first step should be to bring the client in to have a conversation with a branch manager. A person is not deemed incapacitated until a doctor declares it. If the concerns are borne out, the adviser needs to raise the issue immediately with any family members and determine if the client has given power of attorney to anyone and whether it is limited (only effective when the person is not incapacitated) or durable (effective through incapacity). The documents should be drafted by an attorney.
From the minute an adviser has concerns about a client, they should document them. He or she also should document any meetings, conversations or other exchanges with family members and others about the situation.
“Document, document, document,” recommended Mr. Parker. “The potential legal implications are scary.”
The documentation won't protect advisers from lawsuits down the road if a family member or other party is determined to sue, but it will help in a legal battle.
The truth is, if an adviser hasn't taken any steps to plan for the possibility of a client's developing Alzheimer's, they are at risk. “If you're seeing signs and haven't done anything about it yet, you're too late,” Mr. Parker said.
