Editor's note: Greg Rudd, CFP, is a vice president at Regions Morgan Keegan Private Bank in Birmingham, Ala. He can be reached at [email protected].

I was motivated to write and research this white paper because of what happened to a close relative of mine. She owned a successful furniture company and the income from that business positioned her well for retirement. Just after she retired, a family friend convinced her to make a large investment in a speculative business venture. This venture failed within two years and left her destitute. She was forced to return to work at age 67 as a maid at a local bowling alley to make ends meet and continued working 13 more years until her body gave out.

Her biggest fear-and the reason she worked so hard in the furniture business-was that she would have to go into a nursing home. She wanted to have enough money to pay for in-home sitters during her waning years. However, once she stopped working, her condition worsened significantly, and she began needing around-the-clock care. The few remaining dollars she managed to save as a maid were depleted in a few months, and she was indeed forced to go into the dreaded nursing home. What's more, she was required to sign over ownership of her modest home to Medicaid to pay for the expenses there. Now, she has practically nothing and is living her worst fear.

Executive Summary

Financial planners will find themselves increasingly needing to develop a more personal understanding of their aging clients, and not just because it's a smart business play. Put aside the monetary interest, and there's something more important at stake-the fact that they might actually be acting as a safety net for people in a vulnerable stage of their lives. As people age, they become increasingly vulnerable to financial abuse as they begin to suffer from diminished mental capacity. Planners can play a role here if they recognize the early signs of decreased mental agility in their clients and step up communications with them. In this way, the planners can create a working foundation beneficial to both parties.

Occurrences of "elder theft" are multiplying at an astonishing rate and will worsen as the first wave of baby boomers reach age 65 in 2011.1  As baby boomers move into their retirement years, many will reach their peak wealth while unknowingly experiencing the early effects of the reduced critical thinking skills that come with age.2  The Internet and other far-reaching, inexpensive communication technologies further compound this problem by leaving the doors wide open for information predators around the globe to commit crimes against retirees.

These converging trends have created a feeding frenzy among modern-day thieves who want to deprive senior citizens of both their life savings and good names. As financial planners, we can do more to help the economic and mental health of our aging clients-not simply by curbing identity theft, but by working to halt all financial abuse of the elderly. To do so, however, planners must keep pace with a rapidly changing financial environment and expand their knowledge about human senescence with an eye to managing the financial risks it poses.

Planners should know, for instance, that older clients are changing cognitively much earlier than commonly thought. According to a recent survey, estate planners and financial advisors need more training to understand these cognitive and physical changes if they are going to protect seniors from financial abuse.3 

By understanding the psychological challenges their aging clients face, financial advisors will improve client retention, expand cross-selling opportunities and burnish their own professional reputation, of course. But again, the most important thing is that they will keep a client from becoming a victim.

According to one expert, identity criminals prefer older targets because they have more assets and are more likely to suffer from an impaired ability to make decisions.4 One report maintains that females are more likely to become victims than males, with average losses ranging from $50,000 to $100,000.5  Since females have longer life expectancies, they spend a greater portion of their lives living alone and relying on others for help with financial matters; thus, they could confront a greater number of people willing to commit fraud against them.

In addition, older clients are easy targets for criminals with access to communication technology, especially if the perpetrator has personal access to the victim.6  When potential abusers are close to the victim it makes the risk that much greater; often these abusers are family members or caregivers who, if they're the ones attending to the aging person, feel somehow entitled to the assets and use that flawed argument as a justification for stealing.7  Even when a senior suspects illegal behavior from a child or caregiver, she may remain silent because she is afraid the caregiver will either harm her or stop helping her.

According to the California Department on Aging, close family members commit nearly 90% of financial crimes against older individuals.8  Common forms of financial elder abuse include the misuse of an older person's checks or credit cards; the theft of cash, income checks or household goods; the forging of signatures; identity theft; and attempts by the perpetrators to change legal documents such as wills, powers of attorney, deeds, insurance policies and beneficiary designations.9  Economic downturns amplify the problem, too. Some people become perpetrators because excessive consumption has strapped them with debt and they cannot meet monthly obligations, including mortgages and car payments. Thus, they look to victimize fiscally prudent individuals.
Although seniors are statistically more likely to be financially abused by those close to them, there are, of course, other dishonest people outside their inner circle of trust who are equally willing to defraud them. The Internet makes it easy for crooks to locate and pursue seniors. In one fraud case, an individual living in Salt Lake City claimed to have created a secret formula that eradicated almost any disease, including Alzheimer's, cancer and chronic pain. As one can imagine, a cure-all like this one does not come cheaply: It cost $10,000 per office visit and required several treatments.

Although the miracle tonic was nothing more than a blend of vitamins and amino acids that a local pharmacist mixed for $15 per vial, the con man persuaded hundreds of people to pay for it. Desperate people learning about the treatment over the Internet sought him out for the promise of a better, healthier life. Regrettably, many senior citizens liquidated their life savings and retirement accounts to get well this way. Eventually, law enforcement officials arrested him, but many older citizens still lost everything.10 

According to congressional testimony by the FBI, crooks seek out older Americans for the following reasons:

Older people have concentrated wealth.
They are interested in "cure-all" medicines and get-rich schemes.
They are less likely to report fraud
People born in the 1930s, 1940s and 1950s were raised to be polite and trusting, and con men prey on these qualities.
Criminals know that the memory impairment suffered by those who are aging makes it difficult for them to understand financial schemes.11

The last point is especially important: Fraudsters observe mental weaknesses and use this information against seniors.
But if that's the case, why can't financial planners themselves use available research on aging to protect these same people? After all, many planners who know their clients very well see or speak to them weekly and constantly discuss important problems. Not to mention the fact that planners have often already made informal assumptions about an older client's mental capacity. Unfortunately, though, there are different degrees of capacity, and planners often do not delineate between them. Mental changes happen slowly over several years and are considered by many to be a normal part of aging in everybody.12  So planners may assume incorrectly that a client is either fully functioning on the one hand or completely disabled on the other, seeing no intermediate stage or assuming that if there is one, it would only be a few weeks or months in duration. In fact, the transitional stage can be several years long. What's more, one must be aware that a client might have total command of the basic activities of daily living (bathing, eating, toileting, dressing, etc.) and yet still suffer some impairment of higher-level cognitive activities known as the instrumental activities of daily living (IADLs). These include cooking, balancing a checkbook or driving. The activities planners should focus on are those related to a client's ability to grasp abstract financial concepts and handle personal finances. A client's ability to understand the nature and location of personal assets and her ability to pay bills on time would be examples of financial IADLs.

Additionally, a decline in one's ability to understand and manage personal finances may be a sign of a condition known as mild cognitive impairment (MCI).13  According to the Mayo Clinic, MCI is a transitional phase between the cognitive decline related to normal aging and early onset Alzheimer's disease.14  Those diagnosed with MCI are at high risk for developing symptoms associated with Alzheimer's within five years.15 MCI and Alzheimer's disease are identifiable disorders of a person's cognitive ability (or lack thereof). They should not be confused with dementia, which simply describes the symptoms of a person with Alzheimer's or other diseases: symptoms such as language difficulties, the loss of recent memory and poor judgment. One expert contends that more than 70 diseases can produce dementia-like symptoms.16  Planners can easily miss cognitive changes associated with aging since these changes develop slowly and sometimes are simply attributed to getting older. Yet those cognitive impairments that are not associated with normal aging could affect up to 20% of people over the age of 65.17  A planner should consider how many of her own clients fall into this 20% group. For example, if a planner has 90 clients over age 65, 18 of them might have diminished mental capacity and be at high risk for financial abuse.

As for the effects of MCI on one's ability to understand and process financial information, recent studies at the University of Alabama at Birmingham show that people with MCI performed much worse in tests measuring the counting and sequencing skills required for managing personal finances.18  Since a financial planner may spend more time discussing financial concepts with clients than anyone else, she is in a good position to first recognize the signs of MCI.

I am not arguing that planners become de facto doctors. But the industry landscape is changing quickly, and business and regulatory pressures will eventually dictate how planners deal with "aging" risk. How should a competent planner react to clients that are declining cognitively in some areas but performing perfectly fine in others? Considering that more than 8,000 baby boomers will turn 65 each day beginning in 2011, now is the time for planners to hone their insight into the mental changes of older clients and develop a blueprint from which to operate.

They should start by understanding the meaning of financial capacity. One authority calls this an individual's ability to independently manage personal financial affairs in a way that is consistent with her self-interest and long-term values. Given this definition, financial capacity consists of three core skills:

Overall financial knowledge involves being able to describe basic facts and events related to one's investments, bank accounts and other financial arrangements.

Performance skills are those routines and systems a person has in place so he can handle basic tasks such as writing checks, balancing checkbooks, counting money and storing important documents such as investment statements.

Judgment skills relate to one's ability to make sound decisions in social environments that are both familiar and unfamiliar. Such decisions should allow the person to consider his own self-interest and be consistent with his long-term values. 19

A person should furthermore be able to integrate all of these three areas of mental function-knowledge, skill and judgment-and when they cannot, MCI may be the reason. Still, some argue there is no single indicator that a client may be cognitively impaired. Financial planners should observe mental changes over long periods while always considering possible mitigating circumstances. Moreover, it is essential to be aware of the stereotypes about aging, social economic background and education. Not all older people have impaired judgment. Financial experiences and skills can vary widely among cognitively normal people. And a planner's own opinions and beliefs can lead to incorrect assumptions about her client's state of mind.20 

The clues of mental impairment listed in Exhibit 1 are not exhaustive, but will help planners better understand client behavior and help them prevent elder abuse.

As mentioned before, there could be other reasons besides cognitive problems for behavior that is out of the ordinary. Stress, a medical condition or recent bad news can affect people's conduct. So planners should take into account any mitigating circumstances before determining that their clients are really functioning with possible mental impairments related to personal finances. If the clients make unexpected requests to distribute large sums or change beneficiaries, those changes should be consistent with their long-term values and core beliefs, keeping in mind that even when cognitive function is compromised, a person may still be able to express their deep-rooted values as justification for their choices.21

When making such requests, a client should be able to articulate sound justifications for a decision if that choice seems to fall far out of step with their stated goals and objectives. If they can't express this coherently, it could be a sign of undue influence and possible elder abuse. For instance, if a client who has a $10 million net worth and is considered frugal suddenly asks you to distribute $50,000 to his beloved nephew, one might view this request as unusual and ask more questions about the reasons for the gift. On the other hand, if this same client is often generous with his wealth, the request might be perfectly justifiable.

One expert argues that the key is to know the client's core values and long-term goals and have an informal grouping system for older clients based on their cognitive states. Grouping senior clients into one of the four broad categories of mental capacity listed below might prove useful for those planners wanting to become more effective with their older clients. Although planners are making a personal judgment call on where a client might fall on the cognitive scale, the various behaviors found in Exhibit 1 can help with the decision-making process.

No evidence of diminished capacity
Some evidence of diminished capacity
Substantial evidence of incapacity
No capacity22

These four categories allow planners to better understand client needs and adjust communication styles to enhance the planner/client relationships, especially for those clients in the first two groups. Using better communication skills with clients suffering hearing loss, vision loss and/or mental impairment, a planner can also tell if the clients are moving into the latter two categories (such enhanced communication skills can be achieved by following the suggestions listed in Exhibit 2).

Clients showing substantial incapacity or none at all may present significant challenges to a planner executing his duties and possibly require intervention by a doctor or family member. This presents ethical considerations. In general terms, if a client is in immediate physical or financial danger, and it is clear that the client cannot protect herself, the planner should immediately consult with those people or entities that can take action to protect her.23  It is often reasonable, within certain guidelines, to reveal information about the client to the extent needed to protect them from harm. Considering the legal implications of this action, however, planners should document files consistently over a long period if signs of mental impairment exist.24  The first exhibit can help planners track client behavior over long periods and serve as documentation that they are paying attention to changing client circumstances.
Since the "Know Your Client" standards for planners are evolving as the population ages, it is desirable to hold open and honest conversations about the realities of aging before clear impairments take hold. If necessary, a planner, with client consent, can help locate a medical doctor or psychologist that can conduct in-depth tests for perceived impairments. Furthermore, seniors showing signs of diminished cognitive capacity should consider transitioning to a discretionary investment arrangement, preferably one with a professional trustee. Professional trustees owe a strict duty of loyalty to clients and must always act in those clients' best interest or otherwise face severe consequences from both federal and state regulatory agencies. Among the services offered by professional trustees and many boutique money management firms are bill payments and checking account reconciliation. It would be pragmatic for cognitively impaired clients to consider such services since the performance and judgment skills they need to manage their finances are sometimes the first instrumental activities curtailed by MCI. By transferring property to a professional trustee for bill paying and investment management services, a person can build a firewall between her wealth and the thieves who would get at it.25 

As the baby boomers begin reaching full retirement age during the next few years, many unknowingly will enter the early stages of mild cognitive impairment, which may be a precursor to early onset Alzheimer's disease. Simultaneously, these people will reach their peak net worth, presenting opportunities for dishonest individuals to exploit senior citizens. Fortunately, planners can play a significant role in protecting clients from harm. They should start by investing more study time to understand the realities of aging and its impact on clients. Professionals should not stop here, however. It is important to take new knowledge and apply it in ways that protect older clients from predators. If they don't, people will ask why they didn't if they saw the signs of a client's diminished capacity. Alternatively, by doing so, a planner will deepen client relationships, improve revenue opportunities and enhance their professional reputation among seniors and their families.

Exhibit 1: Clues to Mental Impairment
Clients showing several behaviors listed here could be suffering from cognitive difficulties and the poor integration of three core skills needed for optimal financial capacity-overall financial knowledge, performance skills and judgment skills. A planner may want to use this work sheet to grade clients for possible impairments and keep it for documentation purposes.

Short-term memory loss
o    Client is forgetting appointments even though he or she has never shown a pattern of doing so
o    Client frequently repeats the same questions as if it is the first time she has asked the question
o    Client easily remembers events from more than ten years ago but not those events occurring in the past few weeks
o    Client is effective at small talk but has trouble going beyond this, even though he or she has always been able to engage in robust conversations
o    Client has confirmed that there is a reduction in memory, and this has also been confirmed by someone close to him or her
o    Client loses statements frequently and calls for duplicates
o    Client has trouble remembering the names of people he or she has known for years
o    The client is relying more and more on personal notes during meetings

Communication Problems
o    Trouble finding the right words (aphasia)
o    Trouble reading (alexia)
o    Trouble writing (agraphia)
o    Trouble staying on topic, bouncing from subject to subject
o    Unconventional reasoning
o    A constant deferring of questions to someone else such as a son or another family member

Comprehension Problems
o    Trouble comparing alternatives
o    Trouble following basic concepts
o    Trouble understanding investment statements
o    Trouble understanding the reasoning behind a change in account values
o    A general fear of change that the client cannot explain (something that should not be confused with stubbornness)
o    Trouble paraphrasing and following a presentation

Financial Management Problems
o    Trouble balancing a checkbook or investment trades
o    Trouble with basic addition and subtraction

o    Client is forgetting directions to your office even though he or she has been there several times
o    Client is having trouble navigating around your office
o    Client believes things are true that most likely are not
o    Client suffering hallucinations
o    Client grooming poorly
o    Client does not recognize familiar objects (agnosia)

Emotional Distress
o    Appears anxious, depressed and slow to respond to questions
o    Shows a wider range of emotions beyond what is normal
o    Moves quickly between laughter and tears without reason
o    Shows feelings inconsistent with the topics at hand (for example, laughing when he or she should be sad)
o    Shows increased paranoia 26

Exhibit 2: Tips for Effective Communication With Older Clients
For clients with hearing problems
    Minimize background noise by closing office doors and forwarding calls
    Look at the client when speaking
    Speak slowly and distinctly
    Do not over-articulate or shout
    Use a lower pitch
    Sit close to the client rather than across a desk
    Focus on written communication

For clients with poor vision
    Increase lighting
    Reduce glare by having client face away from window
    Avoid using glossy material
    Use a larger font-14 or 16
    Give clients more time to read
    Give clients time to refocus when changing topics
    Give clients time to focus when redirecting to a handout
    Have reading glasses available
    Be mindful of the client's narrowing field of vision

For clients with cognitive impairments
    Conduct business at a slower pace
    Ask simple questions
    Allow time for responses to questions
    Break information into smaller parts or have multiple meetings
    Do not jump around topics
    Ask client to repeat or paraphrase to verify understanding
    Set up appointments in midmorning
    Conduct business at the client's residence if possible

For older clients that have trouble making decisions
    Describe the best option for the client first and get feedback from client
    Reinforce the idea that the best options for them are the ones that support their life values
    Briefly explain one or two other options with only key features
    Get feedback from a client to confirm understanding27


1. Alberto R. Gonzales, Attorney General. Combating Identity Theft: A Strategic Plan. Executive Order.  Washington, DC: Executive Branch, U.S. Federal Government, 2007.

2. George Fein, et al. "Older Adults Make Less Adantageous Decisions than Younger Adults." J INT Neuropsyhol Soc (2007): 480-489.

3. Otto, Joanne et al. Report on State and Adult Protective Services Response to Financial Exploitation of Vulnerable Adults. Washington, DC: Administration on Aging and Department of Health and Human Services, 2006.

4. George Fein, et al.

5. Otto, Joanne et al.

6. Where Does Elder Abuse Take Place? 10 December 2008 <http://www.helpguide.org>.

7. Wilson, Kathryn. Kiplinger.com. 8 March 2008 <http://www.kiplinger.com>.

8.  Malks, Betty F. "Elder Financial Abuse and Its Impact." 2006 Senior Summit. Santa Clara County: Department of Aging and Adult Services, 2006.

9. Where Does Elder Abuse Take Place?

10. Dennis M. Lormel, Chief Financial Crimes Section. "Fraud Against the Elderly." Congressional Testimony before the United States Senate Special Committee on Aging. Washington, DC: Federal Bureau of Investigation, 2001. 2-4.

11.  Dennis M. Lormel, Chief Financial Crimes Section.

12.  Assessment of Older Adults with Diminshed Capacity: A Handbook for Lawyers. Washington, DC: American Bar Association/American Psychologicial Association, 2003.

13.  Okonkwo, Ozioma C. et al. "Cognitive Correlates of Financial Abilities in Mild Cognitive Impairment." Journal of the American Geriatrics Society 54.11 (2006): 1-4.

14. Mild Cognitive Impairment. 12 December 2008 <http://mayoclinic.com/health/mild-cognitive-impairment/DS00553>.

15.  S Gauthier, et al. Mild Cognitive Impairment. 9 December 2008 <http;//www.ncbi.nlm.nih.gov/pubmed/16631882>.

16.  Mild Cognitive Impairment.

17.  S Gauthier, et al.

18.  Okonkwo, Ozioma C., et al.

19.  Assessment of Older Adults with Diminshed Capacity: A Handbook for Lawyers.

20. Assessment of Older Adults with Diminshed Capacity: A Handbook for Lawyers.

21. Assessment of Older Adults with Diminshed Capacity: A Handbook for Lawyers.

22.  Assessment of Older Adults with Diminshed Capacity: A Handbook for Lawyers.

23.  Assessment of Older Adults with Diminshed Capacity: A Handbook for Lawyers.

24.  Assessment of Older Adults with Diminshed Capacity: A Handbook for Lawyers.

25.  Rudd, Greg. "Revocable Trusts: An Old Tool for a New Defense." September 2008. Journal of Financial Planning. 14 December 2008 <www.fpajournal.org/betweentheissues/currentedition/revocabletrustsanoldtoolf...>.

26. Assessment of Older Adults with Diminshed Capacity: A Handbook for Lawyers.

27. Assessment of Older Adults with Diminshed Capacity: A Handbook for Lawyers.