ELITE ADVISOR BEST PRACTICES

The Bizarre Case of The People of the State of California v. Glenn Neasham - Part Three

Third in a series about cognitive impairment in older clients

By Richard M. Weber

Key Takeaways:

  • Claims of financial elder abuse against advisors are on the rise, especially in states such as California and Nevada that provide for accelerated legal process, enhanced penalties and even punitive damages.
  • Here are eight key steps for keeping you and your firm less likely to become embroiled in litigation inspired by clients or their children or grandchildren (in other words—the HEIRS!).
  • Documentation, preparation and keeping client interests above your own are essential.


In the previous installment of this serieswe have explored the emerging intertwining of suitability, cognitive ability, surrender charges and felony theft. Understanding these issues is essential for any professional who provides financial advice to clients over the age of 65.

While California purportedly has the most aggressive elder abuse statute, other states have adopted or may certainly in the future adopt similar laws. Both California and Nevada offer an accelerated track to trial, double or treble damages and the possibility of punitive damages. What can advisors to do to protect themselves from the “maw of the law?”

For starters, here are eight key steps for protecting yourself and your firm from claims of financial elder abuse.

1. Even if you think you have an impeccable suitability process, if you haven’t documented the process, you don’t really have it—at least not when it comes to defending yourself with an arbitration panel or a mediator—or at trial—in the event a client (or the client’s children or grandchildren) believe you haven’t done as good a job with your advice and/or products as you thought. The first recommendation is that you develop (or refine) a suitability process and put it in writing. Then follow it impeccably. Then communicate it to your staff. Then communicate it to your clients (if you’re not already giving them an annual ADV-Part II). Then refine it with experience. And train to it. When you’re done—as with painting the Golden Gate Bridge—it’s time to circle back and start the process over again.

2. Consider voice recording every client meeting. Obviously this will require client consent and—implicit to the concept—providing your client with a copy of that recording reasonably soon after each meeting. This may sound extreme, but more and more ethicists and standards-of-care experts are recommending it as a key defensive measure. From a legal standpoint, having a contemporaneous record of a meeting (detailed handwritten notes are OK—recording is better) is one of the few exceptions to the “hearsay rule” that would otherwise be the discountable “he said/she said” that so often pervades plaintiff and defense posturing about the alleged offense. Here’s the script I use to make it OK:

“Jim and Ann, if you don’t mind, I’d like to record this and future meetings we have. The primary reason is so I can stay actively engaged with you in the conversation rather than hunched over a yellow pad taking notes. The other reason is so that—because we’ll send you a copy of each recording—you’ll have a resource to refer back to when you’re thinking about some of the things we discussed and want to refresh your memory about what you said or I said.”

Another advantage of recording the conversation—aside from being a true benefit for the client to review the discussion (we retain less than 10 percent of what we hear 72 hours after we hear it)—is that it tends to keep the advisor more aware of the need for clarity, since, after all, the session is being memorialized.

3. As part of developing or refining a suitable process that puts the client’s interest above one’s own, the non-RIA advisor may want to mimic preparing and distributing to every client the disclosures typically contained in an “ADV,” the main disclosure document between an RIA and the RIA’s client. This document indicates all the services that are provided, a detailed explanation of how the advisor gets paid and a complete description of any inherent conflicts of interest. Disclosure “cures” almost any potential problem that nondisclosure can create.

4. As to the touchy issue of determining a client’s cognitive ability, in the absence of safe harbors attorneys have recommended encouraging older clients to invite adult children or grandchildren, close friends, or an attorney or accountant who works with the client to participate in planning meetings—especially those that focus on implementation of products or advice.

5. Another suggestion is to incorporate into every meeting (regardless of the client’s age) at the appropriate juncture in the process a point where the planner asks the client questions that would elicit a description of the plan or the product in the client’s own words. The planner/advisor/agent can then measure the degree to which the client has an understanding of the fundamentals and can circle back to those concepts or features that may not have been heard or understood.

“We’ve just spent some time talking about features, benefits and drawbacks about this particular annuity (or investment or plan). This might be a good time to ask you—so I can clarify any uncertainties—to explain to me how it works.” [The planner could subsequently add] “… and what it is you see as a benefit to your overall financial plan … and what—if any—you see as the detriments or things to be careful to monitor.”

6. Especially if the discussion is about an insurance or investment product, agents and registered reps are well-advised to take explanatory product material from the insurance carrier/product vendor and develop an “... and on the other hand” written narrative of things the client needs to appreciate that could potentially become a problem or about which there isn’t much clarity, such as surrender charges, liquidity, resale opportunities, etc.

7. Of course, make certain to have any handcrafted product disclosures vetted by the product sponsor or broker-dealer or home office compliance department!

8. Finally, through your professional organizations, carriers, broker-dealers and/or distribution networks, lobby for the NAIC and FINRA to develop processes that advisors can follow with respect to determining cognitive ability and that are ideally administered by third parties who have the expertise and independence to be consistent and effective in protecting consumers from themselves—and advisors from unhappy clients or heirs.


About the Author

Richard M. Weber is an insurance fiduciary whose firm is retained by wealthy individuals and families to evaluate and actively manage existing coverage and to assist in assembling customized portfolios of life insurance policies that optimize client objectives. More information about Weber and his firm is available at www.EthicalEdgeConsulting.com(or email him at Dick@EthicalEdgeConsulting.com).