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Diminished capacity in senior clients is a critical issue facing financial advisors

By Susan Yellin | February 25 2016 03:04PM

The Mutual Fund Dealers Association of Canada (MFDA) is encouraging its members to use some best practices being implemented by a U.S. regulator as guidance in dealing with client issues surrounding diminished capacity.

The move follows a day-long seniors’ summit in October that included the U.S. Financial Industry Regulatory Authority Inc. (FINRA), as well as representatives from the Ontario Securities Commission, the British Columbia Securities Commission, industry associations and investor advocates.

“There is no topic among our members that they are more interested in [than seniors’ issues],” said Shaun Devlin, senior vice-president, Member Regulation – Enforcement, at the MFDA.

Diminished capacity and other legal issues dealing with competing powers of attorney and joint and estate accounts are critical issues facing financial advisors as a large portion of Canada’s population ages and moves into retirement.

Preliminary estimates released by Statistics Canada in July 2015 show that for the first time there were more people aged 65 and older in Canada than children aged 0 to 14 years. The percentage of those aged 65 and older are expected to continue to increase and account for 20.1% of the population by July 1, 2024, while the percentage of children aged 0 to 14 years is predicted to stand about 16.3%.

Among those 80 years and over, about 20% will have some degree of diminished capacity, said Mark Gordon, president and CEO of the MFDA. “When you look at the increasing seniors’ population and the increased lifespan of Canadians, we concluded that for members it’s not if they are going to face this challenge, but when,” he said the summit was told.

Devlin said FINRA has come out with two proposals for advisors, which he said the MFDA is providing as guidance to its members on the diminished capacity issue.

The first is that at account opening, the advisor should get a name from the client of an individual that the advisor can share information with if need be, said Devlin. The second point is that members can delay completing a transaction if there are concerns about mental capacity until more information is gathered.

Another major issue for advisors and seniors revolves around the diligent planning financial advisors must undertake as a big chunk of their clients move out of the asset accumulation stage and into retirement.

Dan Hallett, vice-president and principal at HighView Financial Group, said it’s only been in the last 20 years or so that the issue of withdrawal strategies, rather than asset gathering and asset allocation, has come to the fore.

“Advisors aren’t nearly as well trained on advising their clients on how to draw down their capital as they are on accumulating the capital,” Hallett said in an interview following the summit.

He said clients don’t have the time to make up for major ups and downs in the markets when they are into retirement, so advisors need to be extremely diligent and their advice needs to be particularly careful.

New guidelines

Hallett suggested advisors use estimates of rate of return for senior clients, pointing to the Projection Assumption Guidelines adopted recently by the Financial Planning Standards Council and the Institut québécois de planification financière. The guidelines, developed by a group of actuarial and financial planning professionals, is meant as a guide for advisors to make medium- and long-term financial projections. Advisors are supposed to use the assumptions as a guideline only since different clients face different situations.

“So even if you don’t know where to start, here is a set of figures that advisors can rely on because it’s a composite of expectations from people like money managers, actuaries and economists,” said Hallett. “It should at least be in the ballpark of what they’re trying to achieve.”

Hallett also said advisors should not dismiss the role played by luck and timing. Take the example of a person who retires just as interest rates take a major tumble or a recession begins.

“Because of the potential impact luck and timing can have at the withdrawal stage… [it’s important for advisors to] take control of the things they can control and tilt them as much as possible in the client’s favour. These are things like doing proper planning. As well, as an advisor, make sure you are clear about what your client’s goals are and translate them into quantifiable goals.”

The seniors’ summit was the second of its kind hosted by the MFDA. Two years ago, members, securities commissions and investor advocates raised a number of issues and challenges. This time around, said Gordon, members were looking for more practical advice as an increasing number of Canadian baby boomers leave the workplace, some facing some level of diminished capacity.

“We are definitely on the right track, but we need to do more,” he said. “It’s a big issue and we know it will continue to impact seniors and regulators and we need to keep doing more of the same.”

He said the MFDA has acknowledged that education is important and has planned a number of webcasts for its members. Over the past two years, the regulator has held more than 75 direct-to- member education sessions, many of which dealt with how advisors should advise seniors.

He also said the regulator is active in quickly prioritizing complaints from seniors and has launched a seniors’ section on its website to create a library of resources.

Seniors consultation group

In addition, the MFDA recently struck a seniors consultation group among its members. The goal, said Gordon, is to provide regulators with real-time feedback on what challenges its members and their advisors are facing in servicing clients and therefore what areas regulators should focus on in terms of guidance.

He said all those who were asked to attend the summit were in complete agreement that they must continue to work together for solutions on these issues and others, he said.

“Every situation is a little different and is fact specific and that’s why we have to make sure the dialogue between industry and regulators is free-flowing because we need to work together.”

In late December, the MFDA released a bulletin on the sweep it conducted earlier in the year on deferred sales charge funds (DSCs), especially as to suitability of DSCs for senior investors.

The bulletin provided some good practices and recommendations and concluded that MFDA members need to have adequate procedures in place to assess the suitability of DSC trades, especially for senior investors, adding it will continue to review the issue in future compliance examinations.

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