America is aging, and we owe a great deal of gratitude to the medical community for prolonging lifespans. Unfortunately, with advancing ages come increasing incidences of Diminished Mental Capacity, or DMC. That fact is changing the world of financial planning and investing. Professional financial planners must increasingly deal with Longevity Risk for so long as the trend continues. Running out of money is simply not an option.
Operating in a highly regulated business environment, our profession is in the fishbowl when it comes to protecting elderly clients and their assets. Our main regulatory body is FINRA (Financial Industry Regulatory Authority), and they are not messing around when protecting the assets of Americans of any age, but particularly the elderly. And that, by the way, suits us just fine. One of our top pet peeves is predators who prey on elderly and/or diminished capacity citizens.
One estimate of the annual cost of elder fraud is in excess of $3 Billion, and some estimates are significantly larger.
How can average Americans avoid falling prey to predators? According to FINRA, and incorporated into our Advisory business, is the concept of creating a relationship backup. Called a Trusted Contact Person (TCP), the backup concept was formerly more or less voluntary. Now, regulators are getting serious about the problem, and advisors are expected to implement processes and procedures to protect clients, including a TCP.
It's about time.
Fundamentally, the DMC problem we face as clients’ wealth managers arises when patterns of client behavior change over time. This was first brought to our attention by couples who were becoming suspicious that one or the other may be changing. Patterns of changed behavior often involve unusual and excessive withdrawal requests.
Since we are bound by our Agreements with clients, and this requires honoring all direct requests and orders, we needed a way to protect the family should suspicious requests occur. In response, we created a voluntary system of backup verification for clients who want to add that level of protection for their own funds.
Apparently, we have not been alone in recognizing the problem. FINRA now has a rule (4512) requiring advisors to address this potential problem. Here is how FINRA sees our responsibility:
“…at the time of the account opening a member shall disclose in writing, which may be electronic, to the customer that the member or an associated person of the member is authorized to contact the trusted contact person and disclose information about the customer’s account to address possible financial exploitation, to confirm the specifics of the customer’s current contact information, health status, or the identity of any legal guardian, executer, trustee, or holder of a power of attorney, or as otherwise permitted by Rule 2165.”
It seems that we now have a shared responsibility for monitoring clients’ mental capacities. Rather than an additional burden, we see it as an opportunity to better protect our clients and their wealth.
We will be addressing this issue on an increasing basis with clients and their families, as well as with potential clients who come into our office for their complimentary 1-hour consultation. We will also discuss aging and protection on the Van Wie Financial Hour. Aging is already costly, and losing hard-earned assets to memory problems and/or fraud is unacceptable.
Van Wie Financial is fee-only. For a reason.