How to Protect Your Client—and Firm—from the Risks of Diminished Capacity

Journal of Financial Planning: April 2021
 

Chris Heye, Ph.D., is the founder Whealthcare Planning, LLC.

For most of human history, life expectancy was around 28 years. As recently as the late 19th century, the average person would be fortunate to reach their 40th birthday. From an evolutionary perspective, a well-functioning brain at age 70, 60, or even 50, did not confer much of a survival advantage. Most human beings had already died of smallpox or appendicitis, or an infection, or prostate cancer.

Over the past 150 years, a blink of an eye in evolutionary terms, medical advances have dramatically lengthened lifespans. A healthy 60-year-old male in the U.S. can now expect to live another 23 years. A healthy female, another 26.¹ Medical science has effectively eradicated many of the most historically deadly diseases. For example, in 1900, the number one cause of death in the U.S. was pneumonia or influenza and the number two cause was tuberculosis.² Since 1950, heart disease mortality has declined by almost two-thirds, and deaths from breast cancer declined by about one-third.³

One illness where there has not been much progress is dementia. From 1998 to 2017 there were 146 unsuccessful attempts at developing Alzheimer’s drugs, and several more trials have failed since.⁴ Alzheimer’s is the only disease among the top 10 causes of death in the U.S. that cannot be prevented or cured.

Why is this important for the financial services industry? The average age of a financial planning client is 64 and rising.⁵ We are living longer, but our brains often do not hold up as well as the rest of our bodies. A major study concluded that the “peak age” of financial decision-making is 53, implying that the overwhelming majority of clients are already (well) past their financial decision-making prime.⁶ Many will live for another 30 years or more, with no major advancement in treating dementia on the horizon.

The risks to the client are obvious. The extent of elder financial abuse is inherently difficult to measure, but there is no doubt it is widespread (and COVID-19 has made the situation worse).⁷ The costs of “bad decisions” not associated with financial abuse are similarly opaque. But most of us know older adults who have made unwise choices with their money that they likely would not have made earlier in their lives.

The risks to a firm are equally clear. An estimated 10 percent of adults over age 65 are living with Alzheimer’s.⁸ An additional 3 percent suffer from related illnesses, like vascular or frontotemporal dementia. Another 15 to 20 percent of adults over 65 in the U.S. suffer from mild cognitive impairment.⁹ This suggests that upwards of 25 percent of the average firm’s clients are at risk for poor financial decision-making or abuse.

Diminished capacity cases are typically time-consuming and messy and expose firms to mounting regulatory risks. FINRA recently revised its guidance to explicitly include the age and vulnerability of victims as factors in setting sanctions for misconduct.¹⁰ States are becoming much more active in their efforts to protect older adults. And the publicity associated with diminished capacity cases poses additional reputational risks. Remember Brooke Astor¹¹ or Stan Lee?¹²

So what should firms do to more effectively identify and protect at-risk clients—and thereby protect themselves?

Communicate

Effective and frequent client communication is essential. The goal, says Dr. Anthony Weiner, director of Outpatient Geriatric Psychiatry at the Massachusetts General Hospital, “is to create an alliance” between you and the client.

“Demonstrate that you are on their side, and that you always have their best interests in mind,” Weiner said.

Surveys indicate that poor communication is the number one reason clients leave their financial adviser.¹³ So better engagements around diminished capacity—and health, in general—are a win-win. They protect the client while safeguarding the business.

If you are having trouble initiating client discussions around diminished capacity, start by acknowledging the difficult nature of the conversation, and emphasize the risks of not taking preventative measures. Impress upon the client that it is your job to protect them from all threats, not just market fluctuations.

Adviser action items:

•    Communicate frequently, especially around major life events. (e.g., a serious illness or divorce).
•    Get to know the spouse, children, and other family members.
•    Have conversations about what you should do if you are worried about your client’s ability to make good financial decisions.

Document

It is critical to document the activities you have undertaken to protect your clients from health-related events. It demonstrates to regulators that you are acting in your client’s best interest and provides clients and their families with tangible evidence of the progress you are making towards preparing them for the day when they can no longer safely make financial decisions on their own.

FINRA requires firms under its jurisdiction to collect “trusted contact” information, and it is a good idea to record as many names as possible. Unfortunately, many financial scams are perpetrated by family members, so collecting more than one name can act as a check on a single bad actor. If possible, gather additional information about these individuals, including their relationship to the client and their current and future roles and responsibilities in family financial decision-making.

It is also important to help your client draft the legal documents that facilitate safe and orderly transitions of both financial and health care decision-making. Having these documents in place protects both you and the client.

Adviser action items:

•    Record the names and contact information of (multiple) “trusted contacts.”
•    Draft a “diminished capacity” letter spelling out what your client would like you to do if you have concerns about their decision-making capacity.
•    Make sure your client has a will, durable power of attorney, a trust (if warranted), a medical power of attorney/health care proxy, a living will and/or other advance directives [e.g., a do not resuscitate (DNR) order].

Get Trained

More advisers are now receiving training in the behavioral aspects of financial management, including how to identify and correct client biases and other potentially harmful behaviors. But with so many clients now over the age of 60, shouldn’t advisers also be educated about the behavioral risks associated with getting older? The behavioral changes that occur later in life can be as (or more) consequential for financial decision-making as the typically cited behavioral biases.

Advisers should seek training resources that teach them how to more effectively identify and manage clients with diminished capacity. Training should also include instruction on how to recognize and prevent financial exploitation. These trainings should be informed by medical professionals who specialize in caring for older adults. Advisers can learn a lot from the psychiatrists, geriatricians, neurologists, and geriatric care managers who work with older adults and their families every day. Adviser training programs, educational materials, and industry conferences should strive to include contributions from these specialists on a more regular basis.

Adviser action items:

•    Train with input from medical experts on how to identify behaviors that indicate a client may be suffering from diminished capacity.
•    Train to more effectively initiate and sustain client conversations on “difficult” subjects, like health and diminished capacity.
•    Identify professionals and organizations in your area that your firm can go to for more help (e.g., psychiatrists, Alzheimer’s support groups, and elder law attorneys).

Monitor Behavior

Diminished financial decision-making capacity can be difficult to detect, even for experienced medical professionals. The two most common cognitive tests are designed to measure capabilities like short-term memory, language fluency, orientation, and motor skills.¹⁴ But studies have identified other factors like over-confidence,¹⁵ depression,¹⁶ and impulsivity¹⁷ as harmful for financial decision-making. In other words, your client might ace a standard cognitive test, but still be at risk. Think of the inveterate gambler, or lonely widow/er, or despondent recent divorcee. If you have serious concerns about a client, consult with family members and recommend that they seek advice from an experienced mental and behavioral health specialist.

Poor financial decision-making itself can be an early warning sign of more serious problems. One study found that bill payments started being missed six years before an official diagnosis of dementia.¹⁸ Just by monitoring your client’s financial transactions, you are already helping to spot red flags. Moreover, banks and other financial institutions are becoming more successful at identifying unusual client transactions. And there are now software applications that advisers can employ to monitor a client’s bank and investment accounts, and credit cards.

For example, Whealthcare Planning has created a short online assessment designed explicitly to identify traits that make a person vulnerable to poor financial decision-making and/or abuse. The assessment is based on a clinical study conducted at a major research hospital and endeavors to capture both cognitive and behavioral factors affecting decision-making.¹⁹ It can be administered by advisers without any specialized training.²⁰

Adviser action items:

•    Always be on the lookout for behavioral changes, especially around major life events like a divorce, job loss, or death of a spouse.
•    Use account monitoring software, like Eversafe and other applicable technologies, designed to help evaluate client behaviors.
•    Consider setting up alerts that notify trusted contacts when your client attempts to execute specific transactions (e.g., a stock purchase of more than $10,000).

Educate Clients

After educating themselves on the risks of diminished capacity and other health-related threats, advisers need to pass along what they have learned to their clients. There is perhaps no greater gap in the industry between what the client wants and what the adviser is delivering than in the domain of health and longevity education and planning.

Surveys consistently show that health-related events and costs top the list of financial retirement fears—even for clients in their 40s or 50s.²¹ Client concerns about market developments may ebb and flow, but worries about health invariably increase over time—and COVID-19 has only heightened the level of fear. However, you wouldn’t know this by scrutinizing the educational content that most advisers share with their clients. Advisers sending missives describing the latest market developments, where the Fed is headed, or the do’s and don’ts of cryptocurrencies would serve their clients well by providing advice on how to more effectively estimate long-term care costs, manage living transitions later in life, or care for aging parents.

Adviser action items:

•    Deliver educational content that directly addresses client concerns about diminished capacity, health, and longevity.
•    Offer client seminars on health-related subjects that feature professionals and/or organizations who specialize in caring for older adults.
•    Provide referrals to local mental, behavioral, and geriatric care specialists.

Conclusion

Dealing with diminished capacity can be challenging, but it is not hard to take basic steps that protect your clients and your firm. You don’t need to be a medical doctor to get to know family members, monitor spending patterns, organize legal documents, set up transaction alerts, draft a diminished capacity letter, or communicate clearly and often. Your clients will thank you. 

Endnotes

 

1. See the Social Security Administration’s Retirement and Survivors Benefits: Life Expectancy Calculator at www.ssa.gov/oact/population/longevity.html.
2. See “Leading Causes of Death, 1900-1998,” from the U.S. Centers for Disease Control and Prevention at www.cdc.gov/nchs/data/statab/lead1900_98.pdf.
3. See www.statista.com.
4. See “A Long Line of Alzheimer’s Failures: Roch Drops Two Drug Trials,” from Biospace at www.biospace.com/article/a-long-line-of-failures-roche-drops-alzheimer-s-drug-trials/.
5. See “Advisors Should Change Fee Structures to Attract Nex-Gen Clients,” in Financial Planning, available at www.financial-planning.com/news/financial-advisors-should-change-their-price-module-to-attract-new-clients.
6. See “The Age of Reason. Financial Decisions over the Life Cycle and Implications for Regulation,” from Brookings, available at www.brookings.edu/bpea-articles/the-age-of-reason-financial-decisions-over-the-life-cycle-and-implications-for-regulation
7. See “Americans Have Lost $145 Million to Scams Linked to Covid-19,” from CNBC, available at www.cnbc.com/2020/09/22/americans-have-lost-145-million-to-fraud-linked-to-covid-19.html.
8. See “2019 Alzheimer’s Disease Facts and Figures,” from the Alzheimer’s Association, available at www.alz.org/media/documents/alzheimers-facts-and-figures-2019-r.pdf.
9. Ibid.
10. See “The National Adjudicatory Council (NAC) Revises the Sanction Guidelines,” available at www.finra.org/rules-guidance/notices/20-37.
11. See “The Battle for Mrs. Astor,” from Vanity Fair, available at www.vanityfair.com/news/2008/10/astor200810.
12. See “Stan Lee Elder Abuse Case: Former Business Manager Pleads Not Guilty,” from USA Today at www.usatoday.com/story/life/people/2019/06/05/man-charged-elder-abuse-stan-lee-pleads-not-guilty/1362104001/.
13. See “Natixis Survey Finds Financial Professionals Expect Strong Industry Growth,” from Natixis Investment Managers at www.im.natixis.com/us/press-release/natixis-survey-finds-financial-professionals-expect-strong-industry-growth.
14. Read more about the MoCA test here, www.mocatest.org/. Read more about the Mini-Mental State Exam (MMSE) here, www.ncbi.nlm.nih.gov/projects/gap/cgi-bin/GetPdf.cgi?id=phd001525.1.
15. See “Aging and Financial Decision Making,” in  Management Science.
16. See “Is Psychological Vulnerability Related to the Experience of Fraud in Older Adults?” in Clinical Gerontologist.
17. See “Cognitive Function as a Proxy of Financial Decision Making in Older Primary Care Adults,” in Alzheimer’s and Dementia.
18. See “Financial Presentation of Alzheimer Disease and Related Dementias,” in the Journal of the American Medical Association.
19. See endnote No. 17.
20. For a more complete overview of technologies designed to protect older adults, see “Use Technology to Serve and Protect Older Clients,” in the Journal of Financial Planning.
21. See the Franklin Templeton 2019 Retirement Income Strategies and Expectations (RISE) Survey, and the Merrill Lynch 2013 Retirement Study.