How Advisers Can Protect Clients With Diminished Capacity

Here are five steps financial advisers can take to identify, help and protect their wealth-management clients who may have diminished capacity.
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What are the realities, opportunities, and risks of diminished capacity for the financial services industry?

“Absent a major breakthrough in the treatment of Alzheimer’s and other forms of dementia, the prevalence of diminished capacity in financial wealth management clients will increase as the population ages,” wrote Chris Heye, the founder Whealthcare Planning, and his co-authors in a white paper recently presented at the American Society on Aging 2021 Annual “On Aging” conference. “Based on the available statistics on the frequency of Alzheimer’s, other forms of dementia, and mild cognitive impairment, upwards of 25% or more of an average firm’s clients are already at risk.” 

This suggests, he and his co-authors wrote, that 25% or more of the average firm’s total assets under management are similarly at risk. And this percentage will continue to rise as long as the average age of the client population increases.

Given that, Heye and his co-authors recommend that firms view diminished capacity the same way they would perceive any other risk that threatens 25% or more of their business. “Time and money spent protecting clients and preparing them for the day they can no longer safely manage finances on their own is likely to be a valuable investment over time. It is a clear win-win result for both your firm and your client.”

The good news is this: “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,” Heye wrote in a recent Journal of Financial Planning article.

So, what are the basic steps that will protect your clients and your firm? Here’s a snapshot of what Heye wrote and his action items for advisers.

Communicate

Effective and frequent client communication is essential, according to Heye.

Here are the adviser’s 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, Heye wrote.

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].

Training

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.

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.

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.

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.

Read more: In an interview for Retirement Daily, Heye discussed his white paper, Cognitive Overload: The Coming Surge In Diminished Capacity Cases And What Wealth Management Firms Can Do To Protect Their Clients And Themselves, and his Journal of Financial Planning article.