COMPLIANCE CORNER
Silent Threats: Elder Abuse in the World of Registered Investment Advisers
By Thomas D. Giachetti, Esq. and Mittal Patel, Esq.
As the population continues to age rapidly, ensuring the financial well-being of elders has become increasingly complex. RIAs are trusted professionals dedicated to helping clients grow and protect their wealth. This trust includes implementing reasonable policies and procedures to help detect and avoid elder abuse. This serious and often overlooked issue can deplete elders of their savings and financial autonomy. This concerning reality highlights the need for investment advisers to have heightened awareness and to implement policies to help detect and avoid the occurrence of elder abuse.
Understanding Elder Abuse
Elder financial abuse involves the improper or unauthorized use of an elder adult’s money or assets, including theft, fraud, coercion, and manipulation. Incidents of elder financial exploitation are becoming more common, including incidents perpetrated by trusted people such as family members and caregivers, and yes, even professionals like financial advisers. Elders are particularly at risk because of factors such as cognitive decline, social isolation, and reliance on others to manage their financial matters.
Too often, elder abuse goes undetected or unreported until the abusive activity has occurred. Factors such as cognitive decline, embarrassment, misplaced trust, or fear of losing their independence can prevent seniors from coming forward.
Fiduciary Duty and Elder Abuse
Investment advisers owe a fiduciary duty to act in their clients’ best interests, including both a duty of care and a duty of loyalty. This duty extends to include helping identify potential financial abuse, particularly among vulnerable and elderly clients. Investment advisers should remain vigilant for signs of financial exploitation of elders, which may include unusual transactions, sudden financial plan changes, or involvement of unfamiliar parties. Fiduciary standards require investment advisers to implement policies and educate employees to help identify suspected abuse and, when applicable, to work closely with trusted contacts or legal authorities to safeguard the client’s financial well-being and autonomy.
Detecting Elder Abuse
Investment advisers must be prudent not to overlook elder abuse warning signs. For this reason, policies, procedures, and ongoing education of firm employees are critical. Red flags can include sudden changes in a client’s financial behavior (such as sudden or repetitive account withdrawals) or an individual becoming newly involved (including a family member) in the client’s financial affairs. See below for more about red flags.
Preventive Measures and Safeguards
Preventive measures and safeguards are essential tools that enable RIAs to help detect and protect elderly clients from financial abuse. By proactively identifying potential vulnerabilities, RIAs can potentially intervene early, helping to preserve the client’s financial security by being aware of elder abuse red flags.
Financial Exploitation Red Flags
Red flags of financial exploitation include but are not limited to the following:
- Caregiver or other individual shows excessive interest in the client’s finances or assets, does not allow the client to speak for himself, or is reluctant to leave the client’s side during conversations
- Client shows an unusual degree of fear or submissiveness toward a caregiver or expresses a fear of eviction or nursing home placement if money is not given to a caretaker
- New caretaker, relative, or friend suddenly begins conducting financial transactions on behalf of the client without proper documentation
- Change of status issues, i.e., new power of attorney, trustee, trusted contact, revised will, change of beneficiaries, etc.
- Client’s financial management changes suddenly, such as through a change of power of attorney or trustee to a different family member or a new individual
- Requests for substantive changes to the account, like an address change to an address that is not the client’s address
- Client moves away from existing relationships and toward new associations with other “friends”
- An unusually large request for an account withdrawal
- New repetitive account withdrawals
- Client shows reluctance to discuss financial matters
Too often, withdrawals can occur with the assistance of the investment adviser. Advisers have to pause and ask questions when they believe a transaction may not be in the best interests of the client, i.e., a family member or caregiver requesting or making account withdrawals that are not for the benefit of the elderly client, including when such transactions are initiated by the client’s trustee or power of attorney. Investment advisers are not compelled to assist with transactions they suspect are not in the client’s best interests. Account withdrawals/disbursements should be monitored on an ongoing basis, with special attention to unusual, large, or repetitive withdrawals. Such ongoing monitoring is a daily task on our recommended Compliance Protocol/Checklist. In addition, be especially prudent to regularly supervise accounts where an employee of the investment adviser serves as a trustee for a client.
Trusted Contact Form
A trusted contact form can strengthen an adviser's compliance efforts and demonstrate a proactive commitment to client well-being. Trusted contact forms authorize advisers to reach out to a designated third party if there are concerns about unusual account activity, suspected fraud, or changes in a client’s health or behavior. Though the trusted contact may have no authority over the account, they can help verify concerns and assist in ensuring the client’s safety and financial well-being. This added layer of protection is especially valuable for elderly clients, who may be more vulnerable to fraud or cognitive decline.
Power of Attorney
A power of attorney is a tool that allows trusted family members, caregivers, or designated persons the authority to manage an elderly person’s financial decisions when they are unable to do so themselves. This legal arrangement usually offers peace of mind by helping to ensure the elder’s wishes are respected. However, the power entrusted through this role can sometimes be misused, leading to elder abuse and financial exploitation. When possible, before taking instructions, RIAs should seek to reasonably verify that the power of attorney document is valid and thereafter remains in effect, without modification.
Employee Training
RIAs should commit to continuously educating their employees to effectively support clients at every stage of life, including retirement. This ongoing education and commitment can help ensure advisers remain better equipped to address each client’s evolving needs and circumstances with care and precision.
Reporting
When an RIA suspects an elderly client might be facing financial exploitation, it is crucial for employees to act in a timely manner. As a best practice, employees should address such concerns to the chief compliance officer or designated person to help ensure compliance with all regulatory requirements. The chief compliance officer or designated individual should then carefully review the situation to decide on appropriate next steps. This process will help ensure the RIA’s commitment to safeguarding clients and ensuring compliance with all applicable laws.
Should/must the RIA report suspected abuse to the authorities? The answer depends on local and/or state law requirements (if any) and potential other factors. The RIA’s legal counsel should be consulted.
Summary
Elder abuse is a serious and often hidden threat that can be a detriment to the financial health of elders. Its subtle nature makes detection often difficult and allows for the financial exploitation to go unnoticed until significant damage occurs. Investment advisers can play a crucial role in helping to detect and prevent elder abuse by implementing policies and procedures, conducting employee education, and maintaining ongoing vigilance to help detect red flags.
Thomas D. Giachetti is a senior shareholder, and Mittal Patel is an associate of the Investment Management & Securities Practice Group of Stark & Stark, a 125+ attorney law firm representing investment advisers throughout the U.S. and abroad.
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