Laura Watts, senior fellow and staff lawyer at the Canadian Centre for Elder Law, co-wrote the recently released “Report on Vulnerable Investors,” which chronicles the rise of elder abuse, financial exploitation, undue influence and diminished mental capacity in Canada, as well as the ill-preparedness of investment firms to deal with them.
Watts says time is of the essence to change the status quo, because of the huge intergenerational transfer of wealth already underway as the baby boomer generation transitions to retirement. “The situation is bad now, but it will get much worse if nothing is done about it quickly,” she says.
“Billions of dollars are going to change hands in the next five or 10 years, so we must take advantage of the opportunity to move right now on these issues, to help everyone do the right thing.”
Kimberly Whaley, principal at Whaley Estate Litigation in Toronto, says financial advisors are often “caught between a rock and a hard place” when they suspect a person is struggling cognitively or being taken advantage of.
“On the one hand, they may well be the first entity or person to become live to the possibility that all is not well with a client,” Whaley says.
“But on the other hand, it’s difficult for them to know how to act, because they have certain duties toward investors, and there are no guidelines or mandatory reporting rules.
“The need to protect a person’s autonomy bumps up against the need to protect a vulnerable individual, and it’s going to happen increasingly with our aging demographics,” she adds.
However, Watts says the nature of their relationships with investors also means advisors are uniquely well placed to detect and prevent financial abuse.
To ensure that investments match risk profiles, advisors are required to conduct “know-your-client” interviews, a process that often includes an annual consultation in person or over the phone.
“It’s not like walking into a bank, where you might see a different person every time,” Watts explains.
“These tend to be long-term situations, almost like a family doctor. Advisors get to know you and see changes over time.”
In addition, Watts says that while sufferers with good coping skills can often cover up the first signs of dementia or cognitive impairment, that’s not so easily done in discussions over finances, because they involve executive function.
“Financial management is usually one of the first things to go, and the inability to understand higher-level mathematical calculations is a big neurological red flag,” she says.
Together with her report co-author Marion Passmore, director of policy at the Foundation for the Advancement of Investor Rights, Watts has come up with a set of six recommendations designed to help advisors in the investment industry transform its role in abuse prevention.
Trusted contact person: The report says securities regulators should require firms to ask clients for the name of a trusted contact at the time they open their account, to be confirmed or updated annually.
Temporary holds: Qualified individuals within firms should be authorized to place a temporary hold on trades or disbursements of assets belonging to a vulnerable client, if there is reason to believe that the investor has lost capacity or that financial exploitation is occurring.
Legal safe harbour: Firms that disclose clients’ private information as part of a report to government agencies, law enforcement or a trusted contact person should be protected from legal or regulatory liability, as long as the disclosure was made in good faith, the authors say.
Conduct protocol: Passmore and Watts urge securities regulators to publish a conduct protocol setting out the steps firms and representatives should take to identify and protect vulnerable clients, which firms can then use as the foundation of their own policies and procedures.
Education and training: Firms should be required to train staff in the areas of elder abuse, undue influence, mental capacity issues, enduring powers of attorney and ageism, says the report.
Securities regulators should provide a gatekeeper role in terms of content and ensuring that minimum proficiencies are met, the authors add.
Outside resources and responders: Firms must learn how and when to refer a case of suspected elder financial abuse, undue influence or diminished mental capacity, as well as who to make their concerns known to. Without a centralized reporting centre in Canada, the local responders will differ from province to province, Watts and Passmore note. “We call on securities regulators and the investment industry to really engage on these issues,” Passmore says.
Watts says the willingness of investors to act as gatekeepers is only part of the solution and that proper training is essential to make sure it’s done right.
“If you go in with limited knowledge, you can make the situation worse, by accidentally notifying an abuser, for example,” she says, adding that the response from the investment industry has been overwhelmingly positive to the report. According to Whaley, it’s not just financial advisors who could benefit from additional training on spotting the signs of elder abuse.
“We all could. When I went to law school, we didn’t learn about the red flags for undue influence or capacity problems,” she says.
“These are inherently complex issues that almost every jurisdiction in the world is struggling with.
“We need to get the information out there, have everyone trained to be alert and, hopefully, find a model that works,” Whaley adds.
Charles Wagner, an estate litigator and partner at Toronto firm Wagner Sidlofsky LLP, says he welcomes anything that could improve early detection of elder abuse.
“I have a skewed view, because I deal with it when the situation explodes and the problems become clear, which certainly seems to be happening more often,” he says.
“If someone suspects that an elderly person is being taken advantage of, I tell them to call the police, but they won’t always get involved.
“Another option is the Public Guardian and Trustee or the Advocacy Centre for the Elderly, but truth be told, nothing can replace a competent lawyer who will seek a full accounting and the reversal of any illegitimate gifts,” Wagner adds.