TORONTO - Most financial advisors don’t give much thought to how their livelihoods could be crippled or ended due to a compliance error, according to attorney John P. Huggard. In an advance copy of the speech he will give here today at the Million Dollar Round Table (MDRT) 2014 annual meeting, Huggard made a case for keeping that from happening.
The securities specialist laid out 10 areas that are currently on the federal regulatory radar, all of them with compliance implications for advisors. Several of the areas, such as assessing the mental capacity of older clients and adhering to suitability requirements, are hot buttons for state regulators, too. Here are a few highlights.
Selling financial products to older clients who may have reduced mental capacity that is not recognizable is “one of the major issues facing financial advisors today,” said the senior member of Huggard, Obiol & Blake in Raleigh, N.C.
To illustrate, he summarized a few details from the now famous case of Glenn Neasham, the annuity producer who ended up being convicted of larceny for selling an annuity to an older client. The charge against Neasham was that the annuity should not have been sold to the client because the client had reduced mental capacity, Huggard said. Neasham ending up losing essentially everything he owned, as well as his insurance license, because of that case.
The conviction was recently reversed in the California appellate courts, Huggard pointed out. But financial advisors “must still be vigilant when dealing with older clients or any client who might have reduced mental capacity.”
The best way to handle the issue of reduced mental capacity with older clients is to determine whether they have been involved in other transactions that would require mental capacity, the attorney said.
Such transactions would include using a computer, ATM machine or credit cards; refinancing a house, or purchasing an automobile, boat, or other major purchase, he said. In addition, he said, advisors should ask older clients if they have ever been involved in such activities.
This will help the advisor gauge the client’s mental capacity, Huggard said.
In addition, have the client “certify in writing that she or he has never had an issue concerning lack of mental capacity,” he said. For instance, ask the client to fill out and sign a form that has questions such as: 1) When was the last time you bought a car, boat or other major purchase? 2) When was the last time you purchased or refinanced real estate? 3) Have you ever been treated by a professional for any form of dementia or reduced mental capacity?
Huggard also suggested that at least one close family member (son, daughter, spouse) sign a form, too. This form essentially would be a certification by the family member that the older client has never had an issue with reduced mental capacity.
The family member statement might read like this: “My name is ______. I can attest that the above named individual is ___ years old and has never sought professional help relating to reduced mental capacity or dementia nor have I ever witnessed any symptoms or actions that would lead me to believe that the above named individual has dementia or reduced mental capacity. I am unaware of any health problems that might arise in the future involving the above named individual that are not covered by insurance.”
These signed forms will help protect advisors against a claim similar to the one in the Neasham case, Huggard predicted.