Independent advisers create best practices to deal with elderly

While the Securities and Exchange Commission has compiled a set of best practices for working with aging clients, independent advisers have created small-scale solutions for their own firms. Diminished capacity and dementia were headlining topics at the SEC's annual Senior Summit last week as members of the medical, legal and securities industries briefed listeners on best practices for dealing with aging clients. Although the SEC came up with some suggestions in a joint report with the Washington-based North American Securities Administrators Association Inc. and the Financial Industry Regulatory Authority Inc. of New York and Washington last Monday, the report didn't create or adjust any regulations on working with older investors. "The longer you live, the more likely you are to develop cognitive problems, especially as you reach your seventh or eighth decade," said Dr. Jason Karlawish, associate professor of medicine and medical ethics at the University of Pennsylvania School of Medicine in Philadelphia. "There are diseases that impair the brain, but the real-world consequences are difficulties with managing money, and these can manifest themselves in problems with understanding and appreciating financial decisions." Financial professionals come up against a number of obstacles when they try to deal with clients who are losing their cognitive abilities. For example, the definition of "capacity," one's ability to make decisions, may vary from one state to another. The definition also varies according to the transaction that is being made, according to Charles Sabatino, director of the Chicago-based American Bar Association's Commission on Law and Aging. In their study of financial services firms, the regulators noted that some firms created internal task forces for dealing with older investors and the compliance issues that arise. Those task forces are responsible for reviewing procedures and products related to such investors, establishing age restrictions for certain products and providing expert training for financial advisers on issues that come up with aging. In order to prohibit abuse, some firms also ban the use of designations that use the word "senior," while others permit the use of credentials only from national accreditation organizations. Others also conduct periodic supervisory interviews with representatives to discuss older investors' portfolios. The report also showed that firms had escalation procedures, which would allow advisers and brokers to alert a specific member of the compliance department or a branch manager when a client's mannerisms and investment behavior change. Employees should think short term when they are looking for signs of impaired ability, said Michelle Bryan Oroschakoff, managing director and co-chief compliance officer of Morgan Stanley in New York. "We see small changes before others do," she said. A first sign of diminishing capacity, for instance, might be a client who forgets he made a trade. Morgan Stanley has taken a firm- wide approach, setting "risk flags" on older accounts, blocks on various annuity sales for older investors and monitoring clients for unusual trading patterns. Additional steps include mandatory web-based training on aging investors for registered reps. Small independent firms lack the money and staff that major companies have, so they have implemented their own best practices to care for their older clients. In fact, they say they have the upper hand over major firms because smaller firms come to know their investors more intimately. "Because I have fewer resources, I can judge everyone individually," said Howard Roitman, an attorney and certified financial planner at Howard Roitman & Associates Inc. in Las Vegas. The firm doesn't manage assets. "Morgan [Stanley] has to have policies as an institution and while there are perverse incentives to do things that aren't right, as the principal of the organization, I'm far more concerned with my reputation and my business," Mr. Roitman added. He has suggested to clients that they seek psychiatric evaluations to determine whether they have the capacity to make investment decisions. "I'm probably overcautious on that, but for investment advisers, the consequences could be a bad-faith lawsuit," Mr. Roitman said. Others, such as Ron Pearson, owner of Beach Financial Advisory Service in Virginia Beach, Va., have prepared for their older clients by addressing mental decline before it fully develops. "Thankfully, it's not really a big issue for the firm," said Mr. Pearson, whose firm manages $50 million. "But females are living longer and on their own, and that's the most common case." One of Mr. Pearson's clients, who had "good and bad days," was able to rely on her son to help with her finances. Together, they filled out a two-page form the adviser provides for clients who are lucid but may be slipping away: a list of preferred contacts Mr. Pearson can call for making financial decisions, the right time to call these individuals and a client-approved plan for the adviser to follow if the investor becomes incapacitated. "Clients have a higher probability of me acting on an upcoming issue than [would be the case] at a large firm," he said. E-mail Darla Mercado at dmercado@investmentnews.com.