How to Save Clients From Untrustworthy Family or Friends Before It’s Too Late

Leading estate planners explain the ins and outs of hiring trustees and professional fiduciaries.

(Illustration by RIA Intel)

(Illustration by RIA Intel)

Henry Madison (not his real name) is nearing retirement with an all too common problem. He is putting together his estate plans and is hard-pressed to think of a family member or friend that he can rely upon to serve in various capacities such as power of attorney, healthcare proxy, and eventually, executor of his estate. Amid an ongoing pandemic, he feels added urgency to act. “Who will even know if I start to slip and lose my ability to manage my affairs?” he wonders.

Even for clients that have friends or family members to turn towards, a similar challenge may await. While a power of attorney or successor trustee can help at first to ensure that your client’s bills are being paid and other needs are being met, they could soon be overwhelmed. “It can be a full-time job as you’ll be dealing with so many regulations and forms,” says Frazer Rice, a regional director with Nashville-based Pendleton Square Trust Co. “Most lay people find the process to be exhausting.”

To anticipate this challenging future period, advisors need to lay out a game plan that can identify the various professionals that will be needed in the years to come, a process best done while your client is still actively engaged in their own affairs. “Once incapacity sets in, it can be very hard to create any new estate plan strategies,” says Betsy Brown, chief executive officer at Pendleton Square Trust.

Rice says that it’s important for RIAs to recognize that many of the emerging issues will be beyond their core expertise, though that doesn’t mean they don’t have an ongoing role to play, even as clients being to succumb to dementia or other impairments. “The RIAs can be very helpful in spotting issues as they emerge, keeping an eye out for potential fraud, missed payments, and other red flags,” he says.

A good first step is to speak with an attorney that can act as a gatekeeper to the various professionals that will come into play to provide a continuum of support. Brown suggest the creation of a revocable trust, which will often spell out the terms and next steps in the process when incapacity sets in. “A well-constructed revocable trust will make everyone’s life easier down the road,” she says.

Stuart Bear, an attorney with Minneapolis-based Chestnut Cambronne, often gets referrals from advisors seeking help in navigating and selecting the right fiduciaries that can help oversee a client’s day-to-day affairs. He concedes that it’s not always an easy choice. “My clients have an allegiance to their advisor and can be wary of trust companies that insist on managing the client’s assets. They still want the advisor relationship to stay intact.”

Bear sees the advisor as a kind of “quarterback,” coordinating the efforts of family members, estate attorneys, trustees, and providers of fiduciary-level senior care services.

Bear says it’s important that the advisor or estate attorney interview candidates on topics such as how they would handle certain trust matters, their experience and qualifications, their fees, and staff resources.

While Bear helps clients navigate their choices, he doesn’t actually provide fiduciary services himself. “If I am serving as both attorney and fiduciary, that can give the appearance of impropriety and create conflicts of interest,” he says.

But not all clients will require the services of a full-service high-cost trust company to obtain the care of a fiduciary.

That’s where independent trust companies or professional fiduciaries come in. These firms don’t tend to get engaged in the portfolio oversight process (unlike larger financial institutions), which enables advisors to continue their role as wealth counselor.

As a service to his clients, Bear arranges interviews with several fiduciary firms, and tries to ensure that the company will be a good fit. “It comes down to whether the client is comfortable with the firm,” says Bear. It likely also helps to hear how they work with clients that are experiencing dementia, and how they interact with the person that holds the power of attorney.

Many clients will initially balk at the prospect of relying on a third-party that charges fees to provide fiduciary care. “A lot of people think it’s going to be too expensive, but I encourage them to have a meeting to see how the process works and what it actually will cost,” says Bear. To be sure, some large trust companies can be costly for middle market clients. They typically earn a percentage of the value of the assets plus fees for extra services.

Yet other professionals can offer more reasonably-priced services. Vanessa Terzian, an attorney with CA-based Lagerlof LLP, and co-author of “Executors, Trustees & Beneficiaries: Honoring the Intent, The Law & Emerging Trends,” notes that professional fiduciaries can also be CPAs, attorneys or standalone professional fiduciary firms.

Financial advisors tend to be excluded from that list. “There are restrictions against being both a financial fiduciary and a trustee fiduciary,” says Terzian.

The field of standalone professional fiduciary firms continues to grow, and Terzian notes that they are subjected to extensive regulatory oversight. Sometimes, those fiduciaries will take the form of geriatric planning specialists such as Princeton, NJ-based Theia Senior Solutions, which helps advocate for clients to ensure the safety and well-being of older adults with care facilities. It also helps with financial claims administration and navigates senior living options, among other services.

Joanna Gordon Martin, founder and CEO of Theia, started the company when she realized that “while health may be our greatest wealth, people haven’t often thought through who their advocates will be.” Her firm is engaged by trustees, advisors, and family members, often once signs of decline have emerged. “Around 85% of people come to us during a crisis such as a fall, episodes of wandering or elder fraud,” says Martin. “We help establish the immediate needs of the client, how to ensure safety to live independently, potential living transitions, and the next steps to be taken as a power of attorney steps in.”

That’s not an ideal scenario, says Martin. It’s better to address these issues proactively to ensure that the client is well-prepared for when an intensive level of support is eventually required. While her firm doesn’t act in the role of power of attorney, it can help a person navigate the intense workload that falls on their lap. “Someone across the country would find this all very challenging to oversee,” she says.

Theia is a fee-only firm, without any sales commissions, which is an important consideration for fee-only advisors. “We are advocates for the clients and their families alone,” says Martin.

While Theia offers one-time preparatory consultations that tend to cost around $500, many clients engage her firm to develop emergency response plans that can range from $1,500 to $2,500 and help build a detailed roadmap of actions to take. The firm also offers more extensive strategic roadmaps that involve family members and key professionals. That process can take more than 20 hours and cost roughly $5,000.

Theia provides a customized approach depending on each client’s needs. In some cases, these are done as one-time plans for families to take on themselves. In other instances they may be structured as a subscription service with ongoing maintenance fees.

How to tell when a client is in need of fiduciary support? “The transition doesn’t happen overnight but tell-tale signs emerge” says Terzian. These include a failure to pay bills on a timely basis, large amounts of unopened mail, a client repeating themselves frequently, showing up at the office at a time other than their scheduled appointment or general signs of disorientation during planning discussions.

To better assess a client’s current mental state, advisors can help arrange for an exam with a qualified neuropsychologist. Such an exam may be needed before family members decide to invoke a power of attorney.

If a client still prefers to rely on family or friends to provide a fiduciary level of care, the Consumer Financial Protection Bureau has issued a set of helpful guides that describe out best practices. Still, it’s important that the advisor sit down with family members as this fiduciary planning process plays out. “The advisor is better equipped to facilitate these conversations than family members, especially when various family members have conflicting views of the best choices ahead,” says Terzian.

Bear cautions that having a family member or friend step in once a client is incapacitated may not be ideal. Bear refers to the hypothetical “Brother-in-Law Bob” who has ample confidence to serve as a fiduciary because of his track record as a day trader.

Instead, a caring family member or friend can be designated as a “trusted person.” Fidelity, for example, asks that a trusted contact(s) be added to client accounts who the firm may reach in the event they are unable to get in touch with the client, or they are concerned about the client’s health, well-being, or welfare. The SEC’s Office of Investor Education and Advocacy spells out the trusted person contact requirement, which were rolled out in 2018.

Betsy Brown suggests that clients and their families meet with their advisor to help everyone understand what their duties and responsibilities will be once a power of attorney clause is invoked or a successor steps into the Trustee role. Without clear communication, “the lines can get blurred, the ball gets dropped and that’s when elder abuse can happen,” she says. If a client has been the victim of elder fraud, FINRA operates a helpline geared for seniors.

Cases of fraud are widespread. According to a June 2018 study by the SEC, “for every documented case of elder financial exploitation, 44 went unreported according to a New York state study.”

Hopefully, with the right team of advisors, attorneys and fiduciaries in place, such fraud will never come to pass for your clients. And they’ll be well-cared for through their old age.

David Sterman, CFP, is President of New Paltz, NY-based Huguenot Financial Planning