One of the saddest milestones of the advisor-client relationship is when the client has begun to show signs of cognitive decline. Not only is it heartbreaking to watch, but it complicates their financial situation tremendously. Financial advisors are often at a loss for how to proceed and contact my team for support.
Perhaps the most challenging situation is discovering there is no trusted contact or power of attorney (POA) in place when a client’s cognitive capacity has diminished to a point of concern. The financial advisor is unable to take instructions from someone they believe is significantly impaired due to advanced age or dementia. Sometimes, we can’t find any family members to contact. And if a client is fully impaired, they can no longer sign that power of attorney to grant someone else authority to make decisions on their behalf. Unfortunately, social services generally can’t help when there is no actual financial abuse going on. This often leaves financial advisors with their hands tied.
It’s estimated that 11.6 million Americans will live with cognitive decline by 2040, according to a 2022 Alzheimer’s Association report. An RBC survey also shows that 80% of caregivers report some level of financial mismanagement in families affected by cognitive decline. While most of the financial advisors I work with have a POA on file for their clients, the large number of families affected by cognitive decline means it’s important to help clients take steps to put a plan in place, before it is needed.
Conversations about mental incapacity can be difficult; however, outlining the benefits of a POA and how to put one in place can give peace of mind and build trust with clients. Often clients are more receptive when you call this a “contingency plan” rather than referring to it as incapacity planning.
Here are some additional ideas on how to approach that conversation with clients:
Use the COVID-19 pandemic as an excuse to bring it up
If we learned anything from the past couple of years, it’s that anyone can become severely ill very quickly. I’ve seen instances where clients became suddenly incapacitated, their family needed money for medical treatment, but they didn’t have a plan. Without an authorized power of attorney, a financial advisor cannot release any funds without a court order, making the process much more difficult and time-consuming.
Clients don’t have to grant every power under the sun
The vast majority of POA documents that I see grant all power with no limitations. But financial advisors should help clients think deeply about what that document should entail and what rights they want their delegate to have. Do they want the POA to be an adult child? Do they want them to be able to gift money or change beneficiaries? It’s easier for someone to abuse their POA authority when it’s broad, so clients can set strict limitations and specific parameters.
It is recommended that clients work with an attorney to customize their POA document to address their concerns and boundaries.
Set limitations and expectations
Sometimes clients balk at the idea of signing a POA because they feel they are essentially giving up the power to manage their own assets. The best way to approach this is to set expectations for joint decision-making for as long as the client is able to, and wants to, be involved. This option encourages the POA and client to make decisions together and protects everyone involved.
If the client is not open to adding a POA proactively, some states allow for a springing POA, which only becomes effective upon the mental incapacity of the client based on the specified criteria, typically a medical opinion.
It can also be helpful to explain to the client that POA agents have a fiduciary obligation to act in their best interest, keep assets separate, manage things carefully and keep good records. Clients can also name a co-agent and successor POA to allow for oversight and a contingency plan.
At year-end, I urge financial advisors to take an audit of their clients’ POAs and trusted contacts. Just like year-end planning for taxes, charitable giving and health care accounts, take a look at plans for incapacity and ensure that the right trusted contacts are on file. Ask clients about their contingency plan and help them understand the benefits of a POA.
RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.
