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May 21 (Bloomberg) -- It’s a nightmare for families and for their financial advisers: a parent or client with Alzheimer’s and significant money to manage.
For gossip, New Yorkers are feasting on the trial of Anthony Marshall, the only child of the philanthropist, Brooke Astor. She died, demented, at 105. Marshall has pleaded not guilty to charges of manipulating his aged mother into changing her will so he’d get millions of dollars more.
No broker or financial planner has been caught up in the Astor struggle, but those with elderly clients know the potential for trouble. Should they execute an unusual order to sell or buy from a client who seems confused? What if an adult child, who holds the client’s power of attorney, tells the broker to shred momma’s long-term investment plan, sell her securities and ship the money to her bank account?
In general, financial advisers have to follow orders from clients or their legitimate agents, says Linda Whitton, a professor of law at Valparaiso University School of Law in Valparaiso, Indiana. They’re not responsible for a client’s bad decisions or for any losses if an agent drains the account. They’re protected even if the power of attorney turns out to be a forgery, as long as they had no reason to suspect it.
That’s a wake-up call for family members who know that a parent is failing but haven’t thought about what might be happening with the brokerage account.
‘At Risk’ Clients
Financial advisers might be liable, though, if they offer poor investments (such as high-cost annuities) to clients known to have declining mental powers, or accept orders from an agent they think might be exploiting the client.
Last year, the regulators for the securities industry -- the North American Securities Administrators Association, the Financial Industry Regulatory Authority and the staff of the Securities and Exchange Commission -- published a “best practices” report, on dealing with older clients who may be at risk.
The report urges firms to teach brokers how to recognize diminished capacity in a client and to set up internal systems for managing those accounts responsibly.
It also identifies the “red flags” of financial abuse. For example, theft might be afoot if a caretaker blocks phone calls to the client, the client hesitates to speak in front of the caretaker, there are sudden changes in transaction patterns or large, unexplained withdrawals, an unexplained change of address or a power or attorney popping up in the hands of an inappropriate person.
Swift Decline
The Financial Planning Association in Denver is on the case, too. A session at this year’s annual FPA convention is titled, “You Think Your Client Has Dementia: Now What?”
If your parent or client seems to be going downhill, or gets a diagnosis of Alzheimers, you should act quickly. Incapacity can come on surprisingly fast.
Scott Ford, president of Cornerstone Wealth Management Group in Hagerstown, Maryland, says that he gets the family involved immediately, to speed up the planning process. Often, the will needs updating. The parent needs to decide who should hold the health-care proxy and power of attorney and what should be in the living will. Or you may want a living trust, which means deciding who the trustees should be. Documents should be signed while the parent’s mind is still clear, to avoid legal challenges later.
You’ll also want to consolidate the assets, says planner Carolyn McClanahan at Life Planning Partners Inc. in Jacksonville, Florida. As time passes and Alzheimer’s victims lose control, they become more suspicious and more unwilling to divulge what they have.
Planning for Dementia
McClanahan, the firm’s founder, starts planning for dementia risk with clients as young as 50. She takes out a sheet that says, “If I’m worried about mental capacity and think something may be wrong, who am I allowed to discuss this with?”
Putting the assets into a living trust makes it easier for the senior to cede control gradually, choosing what authority to retain and what to give up. Trusts also give an adviser some leeway, if the family’s trustee starts making bad or self- interested decisions. “I’d bring it to the attention of the successor beneficiaries,” McClanahan says. That’s where the fiduciary duty lies.
It’s not as easy to deflect financial abuse by the holder of a power of attorney. That’s a powerful document. It doesn’t provide the protections for beneficiaries that you get from a living trust.
Legislative Solution
Advisers’ hands will be strengthened if their state passes the model Uniform Power of Attorney Act, developed in 2006 by the Uniform Law Commission. It allows institutions to refuse orders from an agent if there’s a good reason to suspect that something’s wrong. The problem gets reported to the state agency that provides protective services to the elderly, which should prevent further abuse.
So far, the act has been adopted by only three states -- Colorado, Idaho and New Mexico -- with the governor of Nevada expected to sign it soon, says Whitton, who drafted the act for the commission. Maine, Ohio and Wisconsin are working on it.
In a functional family, everyone cooperates to keep an Alzheimer’s victim physically and financially safe. In a dysfunctional family, all bets are off. It’s sad but true: adult children and other relatives are those most likely to rip off a disabled parent.
(Jane Bryant Quinn, a leading personal finance writer and author of “Smart and Simple Financial Strategies for Busy People,” is a Bloomberg News columnist. She is a director of Bloomberg LP, parent of Bloomberg News. The opinions expressed are her own.)
To contact the writer of this column: Jane Bryant Quinn in New York at jbquinn@bloomberg.net
