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One of the saddest experiences for a financial advisor is watching an elderly client decline and, despite our best efforts, being unable to protect them from themselves.
I wrote in 2007 about an elderly client who fired me when she was failing cognitively but still legally competent. She had no immediate family, appointed power of attorney, or caregiver to help. There was nothing I could do.
Unfortunately, I’ve seen this happen several times since. Typically, we begin to see a gradual change in someone’s financial behavior: perhaps overspending, neglecting payments or tax filings, or excessive giving or frugality. We address the issue with the client and agree to a plan of action. This works for a while. When we notice the erratic behavior return and discuss it with the client, they have no memory of the plan.
Clearly, it would seem to be time for someone to intervene. Yet that does not easily happen.
Sometimes clients are unaware of their cognitive decline. Sometimes they have distanced themselves from children who could have helped because they don’t trust them. Even when they have a power of attorney, it sometimes requires their agreement to be tested for competency, which they refuse to do.
I ended my 2007 column with, “Unfortunately, this is one area where I don’t have answers. Perhaps someday, I will.”
Seventeen years later, I still don’t. I do, however, recommend several strategies.
1. We offer clients a choice to sign a “Trusted Contact” statement naming someone we are allowed to contact if we believe the client’s behavior may be irrational. For clients without close or competent family members, this can include an agreement that the financial advisor could call for an evaluation if the client’s behavior appeared irrational. That evaluation could be done by several professionals chosen ahead of time by the client. The problem is that a client can make devastating financial decisions in the interval between the advisor becoming concerned and a court declaring the person incompetent.
2. We routinely recommend having an active (not springing) financial power of attorney that does not require a declaration of incompetence. This still doesn’t prevent a client with cognitive decline from devastating their finances before the designated POA chooses to step in or from actively resisting the POA’s involvement.
It also doesn’t prevent the POA from mismanaging the client’s finances. Adult children often step into their duties without knowing or understanding their parents’ financial plan, financial history, or investment strategy. This is why I emphasize choosing a power of attorney carefully. You need to prioritize trust and financial understanding as well as open communication. Be sure the chosen person understands the responsibility and agrees to take it on.
3. Perhaps the best step is to put your assets into a South Dakota Domestic Asset Protection Trust (DAPT) long before dementia is suspected, naming someone other than yourself as trustee. The trustee could be an individual or a corporate trustee (preferably one that charges an annual flat fee). While you would still have the power to fire the trustee, concern about doing so irrationally could be lessened to some degree by requiring that any replacement had to be a corporate trustee. In addition, the DAPT could be drafted so you would not have the power to amend the trust without the agreement of the trustee. This would give some protection against self-destructive choices if you were gradually losing competency.
Ultimately, your financial advisor cannot fully protect you from yourself. Your most important strategy is having the courage to consider, well in advance, the possibility of your own cognitive decline and make the best provisions you can.
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