Financial Advisors: the First Line of Defense against Financial Exploitation

Although older Americans with impaired memory or cognitive problems may appear healthy and retain social skills, their financial capacity—that is, their ability to manage money, pay bills and debts, and make prudent decisions regarding investments and risk—may nevertheless be significantly diminished. Not surprisingly, therefore, financial advisors are often the first people to notice when a person begins to show signs of cognitive impairment—sometimes even before the individual or family become aware. A full 75 percent of advisors in a recent survey indicated they had at least one client who exhibited diminished mental capacity.

Financial advisors’ unique vantage point of having intimate knowledge of clients’ assets and being able to observe related decision making also positions them to often be the first to observe possible instances of financial exploitation.

Sighting Exploitation vs. Reporting It

According to an Investment News survey of 591 advisers nationwide, 62 percent said they had seen or suspected at least one instance of financial exploitation of an older client. This number illustrates  that older Americans are frequent targets of exploitation—by family, acquaintances, and even complete strangers.

Unfortunately, advisors’ role in combatting exploitation has yet to be fully tapped. That same survey found that 56 percent of advisors who had seen or suspected financial abuse failed to report it.  Several factors contribute to this under reporting. The main reason cited in the survey is a lack of sufficient evidence (mentioned by 61 percent of the survey respondents). This is troubling because the standard for financial advisors to report exploitation is to merely suspect it; the responsibility of assessment beyond that then falls with investigators at Adult Protective Services and with law enforcement.  Similarly, 11 percent of respondents indicated they had not reported instances of suspected exploitation because they didn’t know whom to contact with that information.

The Missing Link: Training

The common thread linking these two main factors—a perceived lack of evidence of financial exploitation, and not knowing where to report suspected cases—is the lack of adequate training and tools for advisors.  Most financial advisors do see the need for training and want to be equipped to effectively assist their older clients. A study by AARP’s Public Policy Institute found that 83 percent of advisors think companies should require them to undergo training on issues related to diminished capacity. Yet the same study found that only 33 percent of advisors were currently required to undergo training.

While not necessarily mandated to do so, more than half of advisors said they receive the following kinds of training:

• The FINRA training module on diminished capacity (62 percent);

• how to identify and report suspected elder financial abuse of clients by third parties (57 percent);

• how to identify warning signs for diminished capacity (54 percent); and

• how to specifically address diminished capacity issues (51 percent).

That’s a start, but more needs to happen. Financial advisors are on the front lines of combatting the exploitation epidemic. Greater access to training and reporting tools can help them provide  the service their older clients want and need—and, ultimately, help prevent financial exploitation.