You meet with your clients frequently to discuss complex issues and financial decisions, and you've developed strong relationships with them over time. For this reason, you may be among the first to detect a decline in a client's mental acuity.
The following guide, designed to give financial advisors tips for how to work with clients with diminished mental capacity, can help you frame your conversations in a way that protects their wishes for their assets without violating privacy or personal trust.
Howard: A Fictional Example
Howard is 75 and has been your client for 25 years. Recently, he called you to make a couple of unusually large withdrawals, and he's phoned a few other times asking for instructions and answers to questions you've already discussed.
At your most recent meeting, which he drove to against his doctor's recommendation, Howard mentioned that he's been seeing a new friend and that she's lovely company. She's encouraged him to invest in a social media start-up, and he wants to get in on the ground floor.
He says he'll get around to his estate planning one of these days. He wants his daughter to have everything anyway. On several occasions, he's told you to call her any time you think you need her help. But just how comfortable is he with you discussing his plans with her? Should you tell her about his unusual behavior? Is there a risk that you may offend Howard? What is your role in helping ensure that he's okay?
Proactive Estate Planning
In the above example, there are some obvious red flags for Howard's diminished capacity. The warning signs may not always be quite as noticeable, though. What can you do?
As the financial advisor, your responsibility isn't to determine whether or not a client is suffering from diminished capacity. Rather, your role is to help clients prepare for that possibility well before it occurs. The following actions can help you do this:
- Ensure that your client has a power of attorney (POA). This document authorizes an agent to act on behalf of the client (the principal), with specific authority for specific accounts. Powers of attorney come in two forms—one becomes effective immediately; the other, a "springing power," takes effect after a particular event, such as a determination of incapacity. The POA dictates who will make the determination of incapacity (most likely a physician) and will specify the actions and assets over which the agent has authority.
- Ensure that the POA is "durable." Keep in mind that a POA must be "durable" to remain effective during any period of incapacity. A durable POA will often be titled as such, but it should clearly state that it remains intact throughout incapacity. Remember, a POA is only effective during the principal's life.
- Establish a trust, if the situation warrants one. A revocable trust is a streamlined way to administer assets during incapacity and upon the client's death, without the need for probate. It's important to recognize, however, that a trustee has authority to manage the trust assets only. For assets held outside of the trust, a POA may be necessary.
- Articulate the line of succession. Be sure to review the client's line of succession. For example, the client may designate his son and then his daughter, in that order, as successor trustees in the event that he becomes incapacitated or upon his death.
Relationship planning is just as important, if not more so, than estate planning when it comes to how to work with clients with diminished mental capacity. Here are a few tips to help you get started:
- Face the elephant in the room. While it may be a difficult subject to broach, be sure to discuss the possibility of diminished capacity head-on. Only then can you begin to create a plan for communication. Ask your client if he or she would feel comfortable introducing you to a trusted family member. Be sure to listen carefully to your client's concerns to understand how to better address his or her needs.
- Develop open lines of communication. Ask the client for the name of an emergency contact person to list on his or her file. The client may also name a family member as a "backup" person, authorizing you to share account information with him or her.
- Review and safeguard estate planning documents. Frequently review all estate planning documents, including the POA and any trust documents. You may find it useful to use our checklist to gain a better understanding of the client's goals and help ensure that they're being met. Be sure to safeguard these documents in a secure location in your office, so that they're accessible when you need them.
- Clearly draw your lines in the sand. Be sure that clients are aware of your privacy and confidentiality limitations, as well as your desire to protect them and their assets. Many clients may wish to establish a more informal process, but this leaves the door wide open for uncertainty. Encourage clients to put a formal process in place with legal documents. Once they do, obtain copies for your files.
- Document, document, document. Establish policies to send follow-up communications to your clients that summarize your conversations and meetings. Remind clients of the status of their investments and confirm any instructions they may have given you. These conversations may also help alert you if a client is experiencing memory loss.
The bottom line: You care about your clients and want the best for them. Working with clients with diminished mental capacity presents the difficult challenge of balancing your respect of their privacy and instructions with your efforts to protect their assets and wishes. Proactive planning, careful listening, and discussions with loved ones are your best tools for creating relationships that will span the generations.
Have you had to deal with a client with diminished mental capacity? What red flags did you encounter? How did the experience affect you? Share your thoughts below.