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7 Steps to Protect Yourself, Your Practice and Clients Who Have Diminished Mental Capacity

by Bob Mauterstock, CFP®

Bob Mauterstock photoAs financial advisors, we are about to enter the perfect storm. Several factors are lining up to make the next ten years some of the most challenging years that we will ever face. Consider these facts:

  • Your clients are living longer than their parents.
  • The fastest growing age group are those people over 85—46% of whom will develop some form of dementia.
  • Ten million baby boomers are expected to develop Alzheimer's. One in eight baby boomers will get the disease after they turn 65. And if they don't have it, chances are they will be caring for someone who does.

Practicing without a plan for mental incapacity is like holding a ticking time bomb—sooner or later, it will explode and a client or client's family will go after you for handling their account improperly.

In 2009, Fidelity surveyed 350 advisors. More than 84 percent indicated that they had been touched by someone in their client base who suffers from Alzheimer's. Despite their experience with the disease, more than 96 percent of the advisors did not feel that they were prepared to assist clients with Alzheimer's. Not much has changed since that survey. Very few firms have stepped forward with specific guidelines for their advisors on how to deal with diminished capacity.

Based on my own experience of more than 33 years as a financial advisor, I've developed seven steps, each which will help you work with clients who are suffering from diminished capacity. Each of these steps will help you and your clients, and can minimize risks to you and your practice:

  1. Recognize unusual behavior patterns that your clients demonstrate. You are not a medical professional, so no one is expecting you to be able to diagnose dementia. But if you have been working with clients for any period of time, you will have become familiar with their behavior patterns. If any clients suddenly start showing up late for appointments, have difficulty doing simple math, keep asking the same question over and over, or can't follow directions, you need to start watching their behavior much more closely. It's very possible they are in the early stages of dementia.
  2. Initiate specific steps to protect yourself and your client. If you suspect a client is demonstrating unusual behavior and may be losing mental capacity, consider taking the following steps:
    • Share your concerns with other members of your team, including your compliance officer and supervisor. Note if they have observed similar unusual actions.
    • Make notes of all future interactions with your client, including phone calls and meetings. Save emails and correspondence.
    • Review your client's file to determine if he or she has a durable power of attorney. Is there a provision for loss of mental capacity? If your client is a trustee of a trust, are there provisions for a replacement if he or she shows diminished capacity?
    • Request that your client identify a client advocate. It will most likely be the person who holds the durable power of attorney or it may be a friend or advisor. It is important that the client advocate accompany the client to all future meetings with you. In addition, make sure that you include another advisor in meetings with the client and their advocate. Never meet with the client alone.
    • If your client refuses to include a client advocate in future meetings, will not create a durable power of attorney, and in general, resists all your efforts to protect him or her, consider terminating that client.
  3. Create a long-term care plan for your clients. Work with your clients to develop a long-term care plan. Make sure they are aware that Medicare is not available to them to pay for custodial care. Explain the extensive costs of care that can range from $5,000-$10,000 depending on where they live. Strongly encourage them to look closely at long-term care insurance as an option if they are still healthy. The only other program available to them might be the Veteran's Aid and Attendance benefit if they are veterans who have served in the military during a time of war. The last resort is Medicaid, a joint federal and state program. It will only become available to them if they have used up all their assets and have not transferred funds within the last five years. In most states they must enter a nursing home to be covered by Medicaid.
  4. Build a network of professionals. It is important to create a network of professionals to help you. These people don't need to be part of your firm but should be in your community. Your network should include an elder law attorney, an insurance professional with an understanding of long-term care insurance (if your firm does not offer this service), and a geriatric care manager. It is also important to get to know physicians in your community who have expertise in working with the elderly. You will make a strong statement to your clients if you make them aware that you have a network of professionals that can help them.
  5. Build a relationship with the family. It is important that you have a good relationship with your client's spouse and his or her adult children. At some point you will be actively involved with them in managing your client's financial affairs. I have found that one of the best ways to build a relationship with the family is to organize a family meeting. The family meeting can be a life-changing experience for the entire family if it is conducted properly. This meeting will probably be the first time the family has sat down together with a specific agenda and an outside facilitator who will direct their conversation. The purpose of the meeting is to clarify and discuss the family's plans for the future and the role each family member has in dealing with the needs of mom and dad if one of them is incapacitated. If your meeting is anything like mine have been, you will find that conducting the family meeting will dramatically reduce the family's anxiety during a difficult period. Not only will the meeting offer peace of mind to the healthy spouse knowing that his or her family will work together, it will also cement your relationship with the entire family as their financial advisor.

    If you would like my free guide to conducting a successful family meeting, click here.
  6. Utilize a single source record keeping document. As a client's memory becomes impaired, it is important for your client and his or her family to have a single source to track all important documents and information. I have observed many clients who were facing a family emergency and couldn't find important documents and information they needed to handle their affairs. If your clients are like many of mine, their information is scattered in several different places. You have several options for collecting and maintaining your client's financial information. The method you choose should be the one you are most comfortable with. Some people like the tangible quality of a traditional notebook. Others are more comfortable with an internet-based system. The most important thing is that you select a system that works for you and your clients—and regularly maintain it.
  7. Create an investment policy statement. This statement provides the general investment goals and objectives of a client and describes the strategies that should be employed to meet these objectives. Specific information on matters such as asset allocation, risk tolerance, and liquidity requirements would also be included in an IPS. The IPS is very useful in reinforcing decisions jointly made by you and your client. The statement can also be reviewed by your client's advocate and family members to make certain that it is appropriate—this can protect you if anyone questions your intentions. Several investment policy statement templates are available on the internet.

If you follow these seven steps that I have outlined, you, your clients, and your clients' families will be prepared if diminished capacity ever becomes an issue. Your clients will thank you for the peace of mind you've provided.

© 2016 Robert Mauterstock

Bob Mauterstock is an accomplished speaker, author, and sought-after authority on the financial concerns of baby boomers and their adult children. He is the author of Can We Talk? A Financial Guide for Boomers Assisting Their Elderly Parents. He recently completed his second book, Passing The Torch, Critical Conversations With Your Adult Children. Both are available on his website and on Bob holds a Masters Degree in Education from University of Connecticut, and a Bachelors Degree in Psychology from Princeton University, and holds the CFP®, ChFC, and CLTC designations. Bob is an active member of the Financial Planning Association. He serves on the Board of Directors for Cape Mediation, the Brewster Ladies' Library, and the Alzheimer's Family Support Center.

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