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Diminished capacity describes a decline in a person’s ability to manage their money and financial assets in a way that serves their best interests. This makes them more vulnerable to pressure from unscrupulous individuals, potentially leading to financial abuse or exploitation.
Financial advisers are in a unique position to identify impaired decision-making capacities early on since they work closely with clients in a consultative role. Navigating this complex, sensitive topic will require a delicate approach. Professionals must ensure they uphold their legal and ethical obligations while protecting clients’ best interests.
Identifying the Signs of Cognitive Decline
Only medical professionals can make an accurate determination of dementia or Alzheimer's disease. However, financial advisers can reasonably assume clients are cognitively impaired if they present multiple symptoms. Common signs include sudden behavioral changes, confusion over previously understood concepts, difficulty with basic mathematics and impulsiveness.
Memory lapses are one of the earliest symptoms. In addition to forgetting passwords and account details, individuals may frequently forget appointments or have trouble following conversations. They may appear disoriented, not understanding where they are, what the date is or who they are speaking to. This may manifest as increased irritability or suspicion.
How to Initiate Conversations With Clients
Financial advisers have a responsibility to protect their clients’ economic well-being. Older people are more likely to experience mental decline than young adults, making them one of the most vulnerable populations.
Moreover, the median volume of assets held by older adults is $90,060, making them a disproportionately high target for scammers. On average, they lose up to $34,200 per scam. Research shows that their inability to identify this deception indicates cognitive impairment.
The earlier professionals identify the signs of diminished capacity, the sooner they can prevent their advisees from being financially victimized by unscrupulous charities, scammers or malicious caregivers. However, they must proceed carefully because their actions have life-changing legal and ethical implications.
This conversation is uncomfortable, but important — it reveals what people want to happen if they are unable to manage their own affairs. Some may want to stay in control for as long as possible, while others will prefer to hand power over to physicians or family members.
Working With Family to Enact Safeguards
Professionals should facilitate discussions among family members to ensure everyone understands their responsibilities. However, confidentiality rules may prevent them from disclosing certain information to anyone but the client’s trusted contact person.
Typically, the client must give informed consent. However, they may be unable if they are in cognitive decline. Laws may permit advisers to breach confidentiality in order to reach out to caregivers, but the specifics vary by state. Including a clause in the retainer that authorizes them to contact family members is a solid preventive measure.
What Are Some Options for Clients?
The legal standard for declaring someone incapacitated varies from state to state. However, individuals don’t have to rely on those standards when deciding how to transfer decision-making authority to another.
A durable power of attorney (POA) lets a person appoint an agent to manage their financial and legal affairs. Experts recommend agents hold off on signing the acknowledgment until they are prepared to assume the role. This prevents unnecessary liability exposure. It also avoids an overinclusive POA, which is relevant since diminished capacity typically worsens over time.
A revocable living trust is another option. The trustmaker serves as a trustee as long as they are alive and have the capacity to manage it. Their successor trustee will take over when they become incapacitated or pass away.
Navigating a Client’s Diminished Capacity
Professionals must carefully navigate legal and ethical guidelines during this process.
The Importance of Documenting Interactions
Documenting interactions as soon as unusual behavior becomes noticeable is essential for mapping diminished capacity. A paper trail protects both parties by establishing a verifiable record. Professionals should consider reporting to their firm’s compliance department.
Understanding Legal Responsibilities
The 2018 Senior Safe Act protects financial advisers from liability if they report the economic exploitation of clients who are at least 65 years old to covered agencies, as long as they have received proper training and then made the report in good faith. However, that doesn’t mean they should strong-arm clients into giving up their autonomy at the first sign of mental decline.
Know When to Seek Professional Guidance
When the earliest signs of diminished mental capacity appear, time is of the essence. If an individual’s condition is too severe, professional help is necessary. They may need help from a caregiver, a physician or an adult protective services agency.
Fiduciary Duty and Client Welfare Intersect
Cognitive decline doesn’t happen overnight, so advisers should have time to plan. They should speak to clients about selecting a trusted contact person or adding a clause in the retainer that allows conversations with family members in good faith. Proactive action can help protect the individual’s personal and financial welfare.
Related: How to Help Clients Protect a Future Inheritance from Marital Risk