Risky Business for Wealth Managers – The Grey Area
The management of wealth is a role that often guarantees a certain demographic of the client, being in the 60 plus bracket.
Therefore, it falls to the financial advisor or wealth manager to ensure they are fully familiar with legal difficulties that can arise for their clients within this age group.
Without question these difficulties do not arise for every client, however, statically, they will arise for many.
Often clients within this category can become vulnerable, whether by reason of diminishing capacity or by virtue of being more susceptible to financial pressure or coercion from persons close to them.
These difficulties can be difficult to identify when they arise and therefore it is crucial that wealth managers and financial advisors are familiar with the legal issues arising.
The statistics on dementia are staggering – over 4,000 people every year develop dementia that is at least 11 people every day. The reality is that people are living longer and age remains the primary risk factor for dementia.
Therefore, we are now in an age where many are suffering a loss of capacity.
How can wealth managers protect their client’s assets if they lose their mental capacity?
Provision can be made for a potential loss of capacity by putting in place an Enduring Power of Attorney. This document will have no legal effect until capacity is lost and it is registered with the High Court.
In the event that no such provision is made the only other option is for the person to be declared as a Ward of Court and the High Court to appoint a Committee to look after their affairs.
The Grey Area – Risky Business for Wealth Managers
Thus, the position can be somewhat black and white when there is capacity and when capacity is lost.
The difficulties arise within, what we refer to as, the grey area. This is the point where capacity has started to diminish but is not yet lost.
Whilst in the grey area, the client will still go about their business. In fact, it is very common for people suffering from diminishing capacity to attempt to hide the fact that they are having difficulties with memory etc. Thus, it can be difficult to spot when clients are suffering from diminishing capacity.
It is vital that wealth managers and financial advisors are proactive in reviewing client’s capacity. The relevant test is a functional one, meaning that the client’s capacity should be assessed at the point in time in which they are proposing to make a decision and in light of the issue or decision they are attempting to decide. Medical evidence can be sought to assist in the assessment of capacity.
Wealth managers and financial advisors owe a duty to their clients to ensure that instructions will not be taken other than from a client with capacity. Any decisions made without capacity will be voidable.
Even when a client has the capacity to make a decision, it is essential to ensure that the client is not being unduly influenced by another or coerced into making such decision.
In this regard, it had been established by the courts that financial institutions/advisors who act on instructions, in circumstances where the client was clearly under the undue influence of another, will be found liable for the misappropriated funds as a result of such decisions.
Therefore, the grey area brings with it a substantial risk for wealth managers and financial advisors. The protection of the client, advisor and organisation requires a full understanding of these issues.
If you would like more information or assistance to navigate the grey area and help you protect your clients talk to us first and contact Maria Lakes on 01 649 9900 or via email at email@example.com.