There are many reasons why financial advisers do what they do, but it comes down to the desire to help others navigate the future with foresight to achieve their goals. A cohort that understands the value of this offer better than anyone is retirees or those seeking retirement. They also hold significant wealth that needs professional expertise and management.
Unlike others who make the initial transaction as lucrative as possible, advisers invest in relationships, and our revenue stream is founded on a relationship locked by an ongoing service agreement with the client.
In this article, I want to highlight the risks of taking on such a longitudinal journey with clients, and why diminishing capacity is the biggest risk to our profession unless addressed swiftly.
Firstly, we need to recognise that the human body is a vessel that decays with time until no more. The decaying process involves physical and cognitive processes that slowly wither away.
People are living longer thanks to advances in medicine that tend to aim at prolonging the physical ability but have had little success relating to cognitive decline. The result is that people are living longer, but their cognition was not given the same boost as their body. So there is a mismatch in the natural duration.
Secondly, the correlation between ageing and cognition is well documented. While we are all familiar with dementia, there is a very large portion of adults over 60 who live with Mild Cognitive Impairment (MCI) and their symptoms tend to fluctuate. Therefore, we need to be aware that there are many phases to the journey, not just the familiar end-stage.
As a matter of fact, a study by CEPAR chief investigator Kaarin Anstey and colleagues found that 8% of those in their 60’s had MCI. This increased to 37% for those aged between 70 and 90.
Thirdly, dementia is only one type of umbrella condition that causes cognitive disorder. There are many other neurocognitive disorders such as Parkinson’s disease and Huntington’s disease. It could also be acquired traumatically such as traumatic brain injuries, post-traumatic stress disorder, and even drug/alcohol abuse disorders.
Medications, substance abuse, urinary tract infection, severe pain, sleep deprivation, mental illness etc can cause short term memory issues and concentration issues. This is called delirium. The best way to explain this is trying to have a deep conversation under powerful medications such as a strong painkiller (or a drunk).
Back to the main issue: 37% of those aged between 70 and 90 live with some MCI. A number would have chronic pain and would be taking strong pain killers, and some would have neurological disorders as described and so on.
I dare not venture to estimate the number of clients in this category in an average adviser practice, because this issue clearly requires research. I would not be surprised if it was at close to one-third of the client base falling in the MCI category.
When it comes to contract law, capacity is a big deal. The contract is void if the party has restricted capacity such as minors, people with mental disabilities, intoxicated people and bankrupt people.
In order to avoid the contract on the ground of incapacity, the onus is on the party seeking to have the contract avoided to first establish that:
a) the contracting party was unable, due to mental impairment, to understand the contract at the time of formation; and
b) the other party either knew or ought to have known of the impairment.
I put it to you that your clients tell you about their health concerns, and about medical procedures they undertake and pains and aches. You know the client for such a long time, you would observe changes in sensory, mobility and memory overtime.
The question then is how many of my clients have impaired capacity? Why do they not read documents like they used to? Do they understand Record of Advice documents, Statement of Advice documents? how do I know they have capacity?
My hypothesis is this particular issue will become ‘the’ biggest issue for financial planners because of the risk concentration to this particular cohort of age segment.
I believe that lawyers and estate administrators will be asking questions regarding the legality of contracts between an adviser and their client, particularly where medical evidence proving legal incapacity exists. I believe this informed consent issue will be specifically targeted by litigation lawyers seeking refunds for fees or even unfavourable market movements.
Financal Adviser Standards and Ethics Authority (FASEA) appears to have missed an opportunity to address this issue. I would like to see more on this in the curriculum and how advisers and dealer groups should respond in a humane, dignified way bound by the Disability Discrimination Act. I would also like to see guidelines around when and how to take action and refer matters for Financial Administration hearings.
Finally, the profession through our associations has to move quickly and swiftly to fund research and start collaborating with government and health professionals such as neuropsychologists to adopt a uniform way of measuring capacity. There are already great tools ready used by health professionals that I am certain can be adapted easily. I have used one and it was fit for purpose.