For advisors, preventing financial exploitation requires education, candid conversations, and soft challenges
As stewards of people’s financial lives, advisors and planners have a tough job to do. Not only do they have to provide guidance through the ups and downs of the financial markets, but they also have to protect their clients when they’re vulnerable — and determining that can require a balance of vigilance and sensitivity.
“It’s obvious that seniors would be among the most vulnerable, but really it includes anyone with a diminished capacity to understand their financial affairs,” said Marie Phillips, a wealth advisor at Next Steps Planning with Investment Planning Counsel. “It could be a permanent condition, or it could be temporary based on someone’s current situation.”
Lay down soft challenges
One common but potentially overlooked example, according to Phillips, is someone who’s been recently widowed. If they haven’t had a chance to develop their financial literacy, the sudden avalanche of information, not to mention the emotional toll of losing a loved one, can leave them quite vulnerable to making ill-advised decisions.
“When a client is financially vulnerable, we advisors have to be extra mindful of financial red flags,” she said. “Unusually large and frequent redemptions can be telling, especially when you and your client already laid have a cash-flow plan laid out establishing their income needs and expenses.”
Of course, such transactions could be nothing: they may be evasive about it, but people can go off-track for perfectly valid reasons. In those instances, it’s up to the advisor to ask soft questions and understand what’s going on.
“We’d try to flesh it out in a friendly, non-confrontational way,” Phillips said. “We’d ask questions like ‘Are you going on a trip, by any chance?’ or ‘Did something break down in the house?’”
It’s important to challenge atypical requests for redemptions in a soft way. As a general rule, advisors don’t want to suggest that their client may not have mental capacity — especially if it means they lose access to their own money.
“They could be trying to use it for something perfectly legitimate,” Phillips noted. “But as an advisor, you have to make sure they’re making a decision based on their sound judgment and free will.”
Building a system of protection
Advisors also have to be wary when beneficiaries with powers of attorney make requests for trades outside the client’s risk tolerance. When such individuals treat the client’s account as if it’s theirs already, it’s probably time to push back a little: have a conversation about the client’s investment objectives that have already been agreed upon, and try to understand what’s going on.
“We’re also trying to establish trusted person contacts with all of our clients,” Phillips said. “While they’re still in their office, and while they have capacity, we’re having candid conversations about the need for these safeguards in case the worst happens.”
The Canadian Securities Administrators (CSA) has encouraged the use of trusted contact persons (TCPs) in protecting vulnerable clients; in Phillips’s experience, doctors or lawyers are often named as a TCP. When a client displays unusual behaviour that suggests diminished capacity, the advisor can contact the trusted person and get the facts, which can provide useful guidance and establish whether there’s any need for the compliance department to get involved.
At firms like Investment Planning Counsel, equipping clients against fraud in general is also a priority. Aside from RFID sleeves that can prevent fraudsters from skimming people’s credit-card information, Phillips’s firm provides education on best practices against phishing scams, bogus Facebook quizzes, and other schemes aimed at getting people to give up their money or personal data.
“My social insurance number was actually assigned to someone else’s debt with the same name as mine, and it took several weeks to get it cleaned up,” Phillips said. “So now I make sure my clients know how to check their credit reports; it’s a really simple way to help people who might not even realize they’re being victimized.”