Published July 16, 2013
Providing monetary advice to an aging client can become a legal quagmire for a financial advisor when a customer’s mental capacity starts to diminish.
Dementia or any other form of a cognitive impairment can impede investors’ ability to make financial decisions, and can have a disastrous effect on their investments if left unchecked.
For most people heading into or already in retirement, their main focus is on making sure their assets are protected and growing to cover expenses when the paychecks stop. But experts say designating a person to take charge of their finances in the event something happens is just as important as proper allocation and diversification.
Financial advisors don’t have the legal authority to intervene when clients’ mental state makes them unable to make decisions unless they have been given such authority ahead of time. Without this designation, it leaves the problem in the hands of adult children--or worse, the state.
“If a family has not taken the steps to define how to act financially for a family member in this situation, it may be necessary for the family to petition the court,” says Adam Levy, a registered representative at JHS Capital in Bellevue, Wash. “Every situation is unique, and it may depend on the financial aptitude and location of the family members as to who the court will appoint.”
But advanced planning will ensure investments are protected if a parent’s mind starts to ail, avoiding potential problems and family fights.
“The biggest thing folks can do is have the documentation needed ahead of time,” says Frank Braddock, a registered representative at JHS Capital Advisors in Columbia, S.C. “You would be amazed how often people with large amounts of money don’t have a durable power of attorney.”
Choosing a durable power of attorney is a big decision as this person will make all financial decision in the event of cognitive impairment.
Experts also advise aging investors appoint a health care power attorney to make health-related decisions. It’s not enough to draft the documents, they need to be put in a safe and easily-accessible place that children, financial advisors and attorneys can easily find in an emergency.
Braddock suggests aging parents introduce their power of attorney to the person or team managing their finances. Privacy issues prevent financial advisors from contacting a family member when warning signs start to appear unless they have a client’s consent.
Some advisors urge new clients to sign a document giving the advisor the right to alert the proper people if he or she suspects something is going on. “We tell clients all the time to make sure they involve somebody who can look over their shoulder if they get to a point where they can’t,” he says. “We’ve got clients who are 88 and are incredibly sharp and really understand what’s going on and clients who are 60 and are having a hard time.”
Experts also suggest working with family-centric financial advisors that are used to involving family members. “
If somebody doesn’t have a plan in place they are really susceptible to a lot of potential pitfalls,” says Levy. “It can not only affect their finances but the finances of the generations to come in their family.”