Financial Advisers Owe Special Duties to Clients with Diminished Mental Capacity


Investment advisers face legal liability if they fail to exercise special care in dealing with clients who have diminished mental capacity, such as those with Alzheimer’s disease. They need to have reasonable procedures in place to deal with it, and they need to document every step in the process of implementing such a plan in every case in which the need arises. (“Clients with Alzheimer’s pose ‘scary’ legal risks,” InvestmentNews).

5.4 million Americans suffer from Alzheimer’s disease; one-half of all Americans will develop this disease; 43 percent of those over 85 and 12.5% of those over 65 have it now; and those numbers are increasing dramatically as Boomers age. The cost of care for a person with Alzheimers runs between $600,000 to $800,000 over eight years, according to one wealth advisor cited in the article. In any event, diminished capacity can and should have an impact on asset allocation and other financial and estate planning decisions.

When an advisor suspects a capacity issue, the first step should be to confer with the client in the presence of other family members and firm management. If the concerns persist, then determine whether the client has a power of attorney in place and what conditions on its effectiveness and powers are in the document. Actually, that should probably be something that is explored with all clients on a pre-need basis, perhaps as an intake question. As the article says, be proactive. Any power of attorney should be reviewed and interpreted by a competent attorney.

Advisors should take the time to document every conversation, meeting and action taken in addressing an issue involving diminished capacity. As noted in the article, “The potential legal implications are scary.”

If appropriate steps are taken and documented, the advisor will be doing a service to the client and the client’s family, and protecting his or her own practice and livelihood, too.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.