Rick Kahler, president of Kahler Financial Group in Rapid City, S.D., tells a disturbing story about an elderly former client. The woman had requested that her dividend checks be sent to a new address but subsequently called Kahler again and again to accuse him of stealing her money. Each time he reminded her that she had changed the address — to no avail. Finally, she fired him. “Meanwhile,” he says, “we saw $3 million moving into some strange broker’s account.”
Managing clients who are losing their mental capacity is becoming more critical for advisors as the baby boomers age. And since it can be a nightmare to transfer authority to another individual after a client can no longer make rational decisions, it’s critical to plan well in advance.
Early signs of dementia include forgetting appointments, unusual or frequent withdrawals and lack of focus or understanding during meetings. “The typical onset of dementia is usually so slow that by the time you take action, it may be too late,” says Kahler.
So he asks clients, early in the relationship, for signed permission to communicate directly with relatives, friends or professionals in the event of sudden behavioral changes. Similarly, Patricia Raskob, president of Raskob Advisors in Tucson, Ariz., builds that request into her client intake process: “We have a form for each client who signs on with us,” specifying whom the advisor can talk to “if we notice any problems.”
Linda Lubitz Boone of Lubitz Financial Group in Miami recommends asking clients if a parent or relative has suffered from dementia. “It’s good practice to ask clients about their family health history,” she says, “because Alzheimer’s in a parent may make the client more prone to get it, too.”
If a relative, trusted friend or institution isn’t granted power of attorney while a client is still thinking clearly, the matter can wind up being decided in court, where a judge determines competence and assigns a conservator to oversee the client’s affairs. Usually, that’s an heir or close relative. But if the judge can’t find such a person, he or she may grant conservatorship to an unfamiliar individual or firm.
One helpful structure is a revocable or “living” trust, which can be modified at any time and keeps the assets under the client’s control until he or she becomes incapacitated, at which time a named executor takes over. But not all assets can be put into a revocable trust. (Retirement accounts, boats, cars and planes are among those that cannot.) So a successor who needs to manage all of a client’s financial holdings assets must hold a durable power of attorney.
Advisors should be aware that custodians aren’t all alike when it comes to recognizing power of attorney. Some will honor only their own documents — not the boilerplate but serviceable legal forms that many people download from the Internet. “It’s important to use the power of attorney form from the custodian holding the client’s assets,” says Lubitz Boone. “In our experience, Schwab won’t accept a basic power of attorney without a major hassle with their lawyers,” she remarks. “I imagine Fidelity and the banks have their own forms as well.”
Of course, creating trusts and delegating authority over financial decisions should be part of a client’s estate planning process. Such documents can protect advisors and their clients in the event of a family dispute, says Larry Ginsberg of Ginsberg Financial Advisors in Oakland, Calif. For example, an incapacitated client may have two children, one of whom is inclined to spend assets on the parent’s comfortable care, the other to be frugal in order to maximize inheritance.
The adult child with durable power of attorney — who presumably holds it because he or she was trusted to act in the parent’s best interests — is the one with whom the advisor will align. “Remember, it’s the wishes of your client that still count,” says Ginsberg.