Client Capacity: Issues for Financial Professionals

Are you a financial professional who helps clients make decisions about their money? If so, are you certain that your clients are capable of understanding the information you communicate to them, and of making their own decisions? If you aren’t, you may be placing yourself and your clients at risk.

Capacity is a legal concept. Capacity, with respect to financial management, refers to your client’s ability to make decisions about their finances. These decisions may be risky or conservative, reasonable or unreasonable, successful or unsuccessful. The final outcome of a decision does not determine capacity. Instead, to possess capacity, a client must only understand that they are making a decision that affects their finances, and the decision must reflect the client’s own wishes, without undue interference from others. If you ensure that these requirements are met when taking instructions from a client, you reduce your potential exposure to liability.

One common instance in which capacity concerns arise is the case of a client with dementia. Clients who suffer from dementia may have difficulty understanding information and making reasoned decisions about their finances. They may also be more susceptible to fraud, undue influence, or misunderstandings that could affect their finances. In addition to dementia, there are a number of other serious mental or physical illnesses that are also common causes of incapacity and which financial planners must be aware of.

How can you protect yourself and your clients? Following these simple rules in your daily interaction with clients will give you a good start:

1.            Keep written notes of the instructions you receive, the meetings and discussions you have with clients, major events in your relationship with your clients, changes to the relationship, and who else is involved in the relationship, for instance, a child of the client.

2.            Meet directly with the client without family members or friends present.

3.            Ask open questions: why has the client decided this way? What are their aims or goals? How will this affect others close to them?

4.            Ask personal questions about their life, health, changes to their home or family life, and whether anyone is placing restrictions on their activities.

5.            Consider whether the client is vulnerable, dependent, subject to the control of another person, or whether their relationship with those close to them has recently changed.

6.            If it is necessary, ask for your client’s consent to make further inquiries of their family, caregiver, or doctor in order to allow you to determine whether they are suffering from any of the illnesses which could affect their capacity.

Finally, you may wish to recommend certain proactive solutions to address capacity concerns for your client. These solutions may include granting a power of attorney, or executing a representation agreement for health care or routine financial decisions in favor of a trusted person. Such preparation helps to provide a solid foundation for management of the client’s affairs should they become incapacitated, and can help you to ensure that their finances are protected while also ensuring that your fiduciary obligations to your client are met.

If you have any questions about determining capacity or incapacity planning, please contact one of our Wealth Preservation + Estate Litigation professionals – /practices/practice-areas/wealth-preservation-estate-litigation/.

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