Advisors need to start discussions with clients long before diminished capacity comes into play.svetikd/iStockPhoto / Getty Images
For Johanne Plamondon, the first sign of trouble with her elderly client was the paranoia.
“She just started to act a little bit strangely,” says Ms. Plamondon, financial advisor at Raymond James Ltd. in Calgary. All of a sudden, the client had become very worried about her money and expressed concerns that her son was trying to keep information from her.
But when she checked the woman’s financial statements, Ms. Plamondon realized the issue wasn’t a lack of funds – it was a case of diminished capacity, a condition in which a person’s mental capacity is impaired, meaning they can no longer make financial decisions effectively.
With many Canadians living well into their 80s and 90s, advisors frequently encounter the issue of diminished capacity, a complex area that requires discretion, protocols, and meticulous record-keeping.
In 2021, the Canadian Securities Administrators (CSA) brought in measures to protect older and vulnerable clients from financial exploitation and diminishing mental capacity. These included establishing a “trusted contact person” (TCP) who has no vested interest in the client’s finances and is attuned to their financial decision-making capabilities. This person can be contacted if advisors are concerned a client is being exploited or has diminished capacity.
Unlike a power of attorney (POA), a TCP doesn’t have the authority to make decisions about a client’s investments.
Regulators also introduced the ability for advisors to place temporary holds on a client’s financial transactions should there be a lack of mental capacity or the suspicion of financial exploitation.
Ms. Plamondon ultimately reached out to the woman’s son, who confirmed her suspicions, and contacted her firm’s compliance department for guidance.
“We just have to try very hard to be diligent with our senior clients to get that trusted contact person, which is so important, but also to try to get to know their power of attorney,” she says.
Watching closely for cognitive changes
Advisors need to start discussions with clients long before diminished capacity comes into play, says Carolina Henao, a certified financial planner with Lucem Financial Solutions Inc. at Sun Life Financial Investment Services (Canada) Inc. in Richmond Hill, Ont.
“In every single conversation I have with clients, regardless of their age, I discuss the importance of wills and POAs, and why having those in place can protect their financial interests,” she says.
Ms. Henao also says that because of her long-standing relationships with clients, she can observe changes in family dynamics, ensuring a caregiver or a child doesn’t begin to have undue influence. That might be a new person who is now accompanying the client to meetings, or suddenly playing a larger role in investment decisions.
“We can see if there are changing behaviours between the family members, or if there’s a dominant person that’s particularly influential,” she says.
Paul Bourbonniere, partner and senior investment advisor with Polson Bourbonniere Derby Wealth Management at iA Private Wealth Inc. in Markham, Ont., agrees that close, long-term client relationships are important to ensuring advisors can recognize subtle changes in a client’s behaviour.
House calls can also be valuable with widows and widowers who are living alone and may have unpaid bills lying around.
“We feel we’re morally required, as their advisor, to see how they are answering questions,” he says.
In cases in which there’s some mental decline, Mr. Bourbonniere recommends advisors meet with the client more frequently to be able to identify the best time to reach out to a POA or TCP.
In addition to more frequent contact, there’s also a need for detailed records – both to protect the client and to avoid legal liability on the part of the advisor, Ms. Henao says.
That means keeping track of phone conversations, e-mails and meetings, including who attended and what was discussed, she says. That demonstrates the advisor has been documenting and addressing any issues resulting from a client’s change in cognition.
Ms. Henao says that for liability reasons, she doesn’t refer clients with diminished capacity to a mental health professional who can assess them, opting to contact family members, the POA, or recommending the client talk to their family doctor.
As for the pause on transactions that the CSA recommends, Ms. Henao says in cases in which a client is making a decision that may not be in their best interest, such as suddenly changing a beneficiary or withdrawing all funds, advisors should always try to contact the POA or TCP immediately. They might tell the client, “‘This is going to take a few days – let me get back to you,’” she says.
Mr. Bournonniere says he’s less keen on pausing transactions due to securities requirements around timely transactions.
“But if we are concerned, we’d let the dealer know that the client isn’t making sense,” he says. “Sometimes something like that would be a case where we’d say, ‘Let’s hold off on that,” until a client’s mental status can be determined.
“You don’t want to be offside from a timely transaction point of view,” says Mr. Bourbonniere. “But you certainly don’t want to have decisions being made by someone who isn’t capable anymore.”