New, and Not-New, Responsibilities to Clients

Our clients are aware that they have each signed new advisory agreements during the past year. The new agreements are exactly as before except for the addition of federally mandated exceptions to the confidentiality provisions. Now, if we ever suspect that a client is experiencing “diminished mental capacity” or “elder abuse,” we are authorized and even required to refuse to comply with the client’s directions until we have consulted a designated representative who has been named by the client. It might be well to consider what these two conditions mean. The concepts are not new even though the application of them is, and we have been gratified that our clients have accepted them rather than being resistant to them, as many people in prior generations might have been.

Prior to the last few decades, mental capacity was considered a yes or no question. For centuries, by way of example, the need for the appointment of a guardian for an adult was determined based on whether the adult was able to manage their own property or affairs. If the answer was no, the adult was said to be incapacitated or incompetent (or was labeled with a more stigmatizing description), resulting in the loss of virtually every right and authority shared by other adults. It’s no wonder that prior generations were resistant to such labels. More recently, this yes or no approach has been recognized as inadequate and sometimes unfair. The reality is that many people today experience years or even decades of diminishing capacity. My friends and I increasingly joke (or lament) that we aren’t what we once were. We know that our capacities are diminishing, but we are quick to object that it is happening ever so slowly. Even the guardianship laws around the country have been changed in recognition of the often-gradual process of diminishing capacity. “Limited guardianships” now are based on the recognition that adults might lack capacity to do certain things while remaining capable to do all others.

In the vast realm of financial transactions outside of the legalistic guardianship context, to what do the newly regulated terms “diminished mental capacity” and “elder abuse” refer? They’re based on an evolution of laws over the centuries, but I will venture shorthand meanings here.

Capacity = Understanding

Capacity usually has involved Understanding, for example, the capacity to enter a contract or make a will or convey property. Ignoring the myriad of nuances, the capacity to do these things has required an understanding of the nature of the transaction and the effects or consequences of it. Investment advisors now are being required to assess the level of a client’s understanding of the transaction being directed (such as wiring money to a previously unknown account). Obviously, this can be touchy business. Anyone who has had to say “No, you may not do that” to their own parents has experienced it. It is not a question of whether the parent or the client is competent or lacks mental capacity in the yes-no sense but is rather a more limited question of whether they really understand the transaction in question. The touchy situation sometimes must be faced in order to avoid a worse consequence.

Abuse = Lack of Consent

The concept of Abuse usually has involved Lack of Consent, for example, lack of consent to a medical procedure or to a sexual relationship. For centuries, despite a myriad of changes and nuances, consent by adults has been said lacking when given under threat, deception, or undue influence. Investment advisors now are being required to assess whether a client is being threatened, deceived, or subjected to undue influence by a family member, friend, caregiver, or other person. Again, it can be touchy, but even though the regulatory requirement is new, the responsibility is nothing new.

Not-New Responsibilities

Our fiduciary responsibility is to our clients, to serve their best interests. Potentially, as in cases of their diminished mental capacity or suspected elder abuse, fulfilling our responsibility can require us to put a transaction on hold until the situation has been fully assessed. The new regulations and agreements simply reflect that duty in a more formalized way.

Nothing contained in this publication is intended to constitute legal, tax, securities or investment advice, nor an opinion concerning the appropriateness of any investment, nor a solicitation of any type and does not guarantee future results. The information contained in this publication should not be acted upon without specific legal, tax and investment advice from a licensed professional. Past results are not indicative of future performance.