Prepare for client incapacity

A recent Nielsen study commissioned by Scotiabank found half of Canadians have a will. This figure’s no surprise, as it’s held fairly steady for decades. The study did, however, uncover some surprising stats on powers of attorney for property: Only one-third have them, with 8% admitting they don’t even know what a power of attorney is.

This should concern advisors. Canada’s population is aging and Alzheimer’s is on the rise. According to the Alzheimer’s Society of Canada, an estimated 500,000 Canadians have the disease or a related form of dementia. More than 120,000 of these are under age 65, while one in 11 Canadians over 65 has the disease. If you don’t currently have clients suffering from Alzheimer’s, eventually you will. It’s important to recognize the signs of diminishing capacity and understand your responsibilities towards clients who exhibit them. Equally important is helping clients plan for potential incapacity. This can help ensure that your clients’ assets are protected; it also helps to ensure you don’t face the risks inherent in overseeing an account on which no one’s able or authorized to instruct you.

Recognizing the signs

Here’s a non-exhaustive list of common signs of diminished capacity. The person could:

• appear unable to process simple concepts and have memory loss;
• appear unable to appreciate the consequences of decisions;
• refuse to follow appropriate investment advice;
• make decisions that are inconsistent with previously stated investment objectives;
• demonstrate some behaviour that’s out of character (e.g., a frugal client becomes a spendthrift);
• have difficulty understanding important aspects of the account;
• forget about some recent instructions or completed transactions;
• appear disoriented and/or have trouble communicating; or
• be in failing health.

KYC obligations require that you know and accurately document not only investment objectives, risk tolerance, and financial circumstances, but also personal circumstances and all other relevant considerations. It’s not your role, of course, to determine whether your client has capacity from a medical or legal perspective; but, it is your job to recognize signs of diminished capacity and take appropriate steps to protect your client.

Diminished mental capacity

There’s no single process for dealing with clients with diminished mental capacity, as each situation is fact-specific. In the best of cases, the course of action will be clear: You’ll know the family and have your client’s consent to communicate with them, your client will have powers of attorney in place and you’ll have discussed how to proceed. Unfortunately, it’s seldom this clear-cut.

Nonetheless, there are guidelines and best practices you can follow to protect both your clients and yourself. If a client’s behaving in a way that leads you to suspect he or she may have diminished capacity, you must ensure the investments in the portfolio are suitable and the principal’s protected.

You should also notify and seek guidance from your compliance department. Next steps may involve raising your concerns with your client and her family or their substitute decision maker. Note that you can only speak to other parties if you’ve obtained the client’s positive consent.

In the event the client has advanced mental incapacity and there’s no appointed substitute decision maker, you may need to contact the Public Guardian and Trustee (or provincial equivalent) for direction. In some situations, legal advice may be required. In all cases, you should take good notes and keep meticulous records.

Helping clients plan

There are several steps you can to prepare for clients’ possible future incapacity. Learning as much as possible about clients is crucial and may prove invaluable. Doing so will better position you to identify unusual behaviour that may suggest mental capacity is becoming a concern. For older clients, consider discussing whether family or friends can care for them in the event of physical or mental incapacity. In appropriate circumstances and after obtaining the client’s positive consent, it may be helpful to contact family, friends and other advisors. Encouraging clients to prepare a comprehensive estate plan is the best advice you can give. It isn’t enough to ask clients if they have an up-to-date will. An executor’s authority under a will begins at death, so there’s no authority to act in the event of incapacity. If a client loses the ability to appreciate the consequences of actions in respect of her account, and is unable to give you valid instructions, important decisions about her investments may be delayed without a valid power of attorney appointing a substituted decision maker.

To avoid this, encourage clients to prepare powers of attorney (or other provincial equivalent) for both property and personal care. A continuing or enduring power of attorney for property provides a client with the opportunity to appoint the substitute decision maker (or makers) of their choice to manage their financial affairs in the event of incapacity.

A client may express the wish that you remain as investment advisor for her accounts should she suffer incapacity. To help ensure continuity, seek her consent to communicate with her attorney in the event you have concerns about her capacity.

by Elaine Blades, director of Fiduciary Services, Scotia Private Client Group.