For Barbara McMahon, a senior financial advisor with Waddell & Reed LLC in Kansas City, Mo., the incident was a defining moment, an indicator something was amiss. One day last year her client, a woman in her eighties, took a can of Campbell's soup from the cupboard for lunch, put it in her microwave and tried to heat it without opening the can.   
    "She used to be coherent. I thought she was fine. That's when we realized something was wrong," says McMahon.
    What do you do when clients show signs of incipient Alzheimer's disease or dementia? As a financial advisor, you're responsible for their assets. "Perhaps they've been your client 15 years, and then they start calling and asking the same question two or three times," says wealth manager Mark LaSpisa, a principal of Vermillion Financial Advisors LLC in suburban Chicago, some of whose clients from time to time have exhibited signs of diminished acuity. "It's not a question of if; it's a question of when," he says.
    As the exploding number of retiring baby boomers continues to age, chances are this will be an increasing challenge for wealth managers and advisors. Consider this: Nearly five million Americans have Alzheimer's today, with that number projected to grow to 11 million to 16 million over the next several decades, according to the Alzheimer's Association.
    "We are all aware of the boomers, and the aging of our population," says Vance Clanton, a CFP in Atlanta, whose practice encompasses many retirees. "What many of us don't know is that the incidence or frequency of dementia increases as we age." Often, the presenting symptoms are the inability to manage daily and financial tasks, such as paying bills, balancing the checkbook or even writing checks, says the Alzheimer's Association. Clanton knows the effects of Alzheimer's personally. His mother's dementia was diagnosed when she was in her seventies. She lived until she was 85.
    We have all heard stories of friends and relatives in the later stages of dementia. It is the early stages that pose the greatest problem for financial advisors. In the early years, the disease can begin with short-term memory loss. It might be when a client shows up for an appointment at the wrong time or the wrong day. You might find that a client places an order and then honestly can't remember doing it. The client may question a confirmation, not remembering having placed the order. The best course of action is to just be aware that there might be a medical condition behind a change in behavior.
    Clanton adds: "As you might imagine, in the early stages of dementia, clients are often frightened and are sensitive about their loss of capacity. They know that something is not right. Often, they may tell you. It may take the form of a joke to disarm an uncomfortable situation. The best advice I can share is to pay attention."
    LaSpisa's first case happened about ten years ago. The clients, a husband and wife in their eighties, began showing signs of Alzheimer's. Since then, several other clients have also shown signs of diminished mental acuity. Each case has been slightly different, and LaSpisa has dealt with them all by first contacting the designee to discuss key concerns and to assist with decisions relating to the client. Often this requires serious diplomacy. Sometimes after talking to the liaison, LaSpisa finds the reason is as simple as a recent medication change requiring no immediate action.
    "By eliminating such problems," says LaSpisa, "you can move forward to decide who should be notified in the family. Should the process be started to transfer authority to a successor trustee or an agent using a power of attorney? Does someone need to step in and start monitoring the client's mail and payment of bills? Are medications being taken? Can the client live alone? Who wants to assume responsibility?"
    LaSpisa now has clients who are 70 or older regardless of their mental condition, sign a "family liaison authorization" agreement. This authorizes the firm, following each appointment or phone call, to notify the liaison designated by the client about changes observed in the client's behavior, and what recommendations are being implemented. "By having the liaison, it helps reduce liability from lawsuits from future beneficiaries, since there are no surprises," says LaSpisa. "No one can say after the fact that something should have been done or what was done wasn't appropriate."
    As a side benefit of the family liaison program, LaSpisa has had instances where children who previously were clueless about their parents' finances become clients as a result of the process. Stuart Speer, a CFP licensee with Heritage Advisors LLC in Overland Park, Kan., has an unusual way to test a client's acuity. He uses a cognition test to make a private assessment. From the raw test results, he draws conclusions that he doesn't share, "Lest I be accused of the unlicensed practice of medicine."
    "If I apply for long-term care insurance on behalf of the client," Speer says, "I feel obligated to inform the prospective insurer of all relevant facts; for instance, that I noticed a tank of oxygen or a triple cane in the client's house. However, I could not mention the cognition test or its results because I'm not, as a matter of law, competent to interpret those results. I must report facts, not unschooled speculation."
    A major danger, of course, is the possibility of a person with diminished capacity attracting fraudsters. "They desire the prize the scam artist is presenting so much that they're willing to forego any disbelief in the hopes that somehow it could be true," says Bob Rockwell, a CFP with CCB Financial Services in Sandy, Ore.
    Such was the case recently when a client in her eighties notified Rockwell that she had received a letter announcing she had won a $43 million Portugal lottery, and then a "nice attorney" had called and offered to help her collect her winnings for a mere $1,600 for his services. When she told Rockwell she'd sent a kind of down payment of $20 to Portugal, he tried to locate the scam artists, but only succeeded in reaching an answering machine with an "800" number. He sent the details of the fraud to the adult senior abuse services of the Oregon Consumer Protection Agency.
    "Fortunately," he says, "I had picked up on her vulnerability years before, and as a result recommended she purchase an immediate annuity that would guarantee her a monthly income for life that she couldn't get talked out of. A single premium annuity helps them avoid squandering their money because it works like a pension; you get a monthly income for life."
    A client of Rodney M. Loesch, another CFP licensee at Waddell & Reed, based in Columbia, Mo., gave him a dividend statement on $3.8 million in investable assets for Sun Microsystems and "didn't even understand he owned it," says Loesch. The client's daughter ended up obtaining a conservatorship, meaning a court declared that she could act in her father's interests. To protect himself against possible liability, Loesch makes it a habit to document every activity with each client in his practice in a database, even when he sends them birthday cards. "It's always in the back of my mind: I may have $10 million in E&O (errors and omissions) insurance, but it has a $5,000 deductible."
    How can you guard against possible litigation in such matters? Scott Meyer, an estate planning attorney at Montgomery, McCracken, Walker and Rhoads LLP in Philadelphia, has been involved in a number of litigation matters where financial advisors for such persons have unfortunately become embroiled in family litigation,
    One crucial protection tool he recommends is to guide the client into getting a durable power of attorney, a written instrument in which the principal authorizes another to act for them. It's best if the client engages an attorney to draft this document, says Meyer, but the Internet has resources for do-it-yourselfers. "The financial advisor's authority to act is based on a person's legal capacity, and if you ignore strong signals that the client lacks capacity, you're opening yourself up to liability," warns Meyer.
    That's the path that McMahon and her clients' families took. "When we realized something was wrong, I encouraged the families to get powers of attorney in place because it was clear to me at some point the families would have to take over their relatives' affairs, and that's exactly what happened." McMahon was rewarded for her efforts on their behalf as the children and grandchildren have since signed on as clients.
    For extreme cases of diminished capacity, Meyer advises referring the client to a state or local senior citizens intervention social agency, which in some jurisdictions has governmental authority to interview such people and render assistance.
    On occasion, relatives and sometimes mere acquaintances may try to take advantage of persons who lack full capacity, which could result in the advisor getting caught up in litigation. According to Meyer, such individuals can be sued under what's known as the "doctrine of undue influence." "The advisor has got to be careful not to aid or abet an individual who is actually subverting the (client's) real wishes," he says. "For example, if one child is controlling access or cutting off information to other heirs, the court could say that the child is overmastering the client's free will and take corrective action."
    Meyer also recommends that advisors carefully review their financial contracts with clients, and specify what sorts of tasks are not being delegated, particularly with regard to trusts. Under a still-evolving doctrine, advisors need to work out language with the client that in effect states that it is understood the advisor is not an agent for either investment or management purposes under the "Prudent Investor Act." Some advisors will be surprised to discover that standard arbitration clauses may not cover certain responsibilities delegated to the advisor by a trustee, he says.