In the world of sales, as in the world of financial advice, understanding your customers is critical. However, this is hard when customers are unsure of what they want.

An interesting example was described in a Harvard Business Review (HBR) article featuring Electrolux, the Swedish appliance maker. Despite extensive market research supporting the decision to offer washing machines for free and apply per-use charges, the move did not yield the expected results when piloted in Sweden.

The HBR article suggests that this approach conflicted with the social identity of middle-class consumers, who did not want to be associated with paying per wash — a practice they associated with lower-income consumers. This illustrates the importance of aligning business models with customers’ social identities.

Similarly, General Mills faced challenges with its Betty Crocker cake mixes in the 1950s. Despite being convenient, the mixes did not sell well because housewives felt guilty using them, as baking from scratch was seen as a way to demonstrate love for their families. General Mills realized that they needed to make the mixes seem more authentic. So, they removed the powdered eggs and required consumers to add real eggs when using the mix.  This made the mixes seem more like traditional cakes, requiring “love and attention,” and sales skyrocketed.

These examples underscore a powerful lesson in consumer psychology: people want to feel in control and do things the “right” way. When this sense of control is compromised, resistance arises. This insight is relevant not only in consumer behaviour but also in the realm of investments and financial advice.

When advisors conduct risk assessments, investors often claim they understand market risks and will be able to ride out periodic downturns, but then they panic and want to sell when the market tanks. This plays out often as a combination of investors feeling out of control but also not fully understanding their own attitudes to risk until it moves from theory to reality. This complexity of human behaviour underscores the need for deeper discovery in understanding clients’ true motivations and needs.

Moreover, investors used to exercising control in their careers or their businesses may struggle with ceding control when seeking financial advice. This means that, much like with the Betty Crocker cake mix, there are benefits when advisors involve their clients in portfolio creation and implementation. This doesn’t mean investors are picking stocks; it does mean they’re actively involved in defining their goals and have some choice between portfolios designed to meet those goals.

Co-creation takes longer but, as we experienced at my old firms, it leads to far less attrition down the road. Recent studies have shown that investor self-confidence — a sense of control, belief in their abilities and a clear plan — is closely correlated to loyalty to their advisor. There are many levels of co-creation, just as there are many types of clients. The the advisor’s questioning and listening skills are needed to find the right level of partnership.

Additionally, advisors must connect with clients on an emotional level, demonstrating understanding, empathy and care for their financial well-being. This also requires deep listening and continued questioning to find the hidden motivators that can trigger clients’ seemingly irrational behaviour. The Electrolux and Betty Crocker examples demonstrate that failing to understand customers’ emotions will lead to market failure.

Technical skills are great, but they speak to the head. First, advisors need to speak to the client’s heart. Betty Crocker only succeeded when it showed that it understood 1950s housewives’ need to show love for their families. Advisors can do that by showing they understand clients’ needs and fears, and that they care about clients’ money as much as they care about their own.

The Electrolux and Betty Crocker examples also highlight the importance of status and social identity when it comes to connecting with customers. A future column will examine how understanding clients’ social identities can be useful for advisors as they help clients achieve their financial objectives.

Sam Sivarajan

Planning and Advice

Sam Sivarajan is an independent wealth management consultant and behavioural scientist.

The results are in for FP Canada’s October sitting of the Qualified Associate Financial Planner (QAFP) exam.

The exam was written by 57 candidates, and the pass rate for first-timers was 68%, a release said. That compares to 56 candidates and a pass rate of 81% at the last sitting, in June.

In an FP Canada survey, 73% of candidates said they wrote the exam to enhance their skills and better serve clients, the release said. The same proportion said title regulation was a motivating factor.

In addition to passing the exam, candidates for QAFP certification must have a post-secondary diploma and at least one year of qualifying work experience. Effective April 2024, candidates without a diploma may obtain certification if they have at least five years of qualifying work experience.

QAFP certification launched in January 2020, and there were about 1,400 QAFP professionals in Canada as of Sept. 30, 2023, FP Canada’s website says.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.

Personal finance personality Dave Ramsey recently caused a stir in the financial planning community by claiming that clients should be able to withdraw 8% of their portfolios in the first year of retirement and adjust for inflation each year thereafter without being at risk of depleting their investments.

This bold claim flies in the face of more commonly cited retirement spending rules, like the 4% rule. Safe withdrawal rates — and the 4% rule in particular — have lots of problems, but they are commonly used by investors and recommended in many popular personal finance books. So, it’s worth addressing Ramsey’s claims.

Financial planner William Bengen ignited the safe withdrawal rate literature in 1994 when he wrote the research paper “Determining Withdrawal Rates Using Historical Data.” The result of Bengen’s research was a safe spending rate for a 30-year period, which was determined to be about 4% in his data. This finding was based on historical data for U.S. stocks and intermediate term Treasuries.

Ramsey’s logic is that “good” mutual funds return around 12% per year, while U.S. inflation has averaged around 4% for the last 80 years. This leaves 8% for the retiree to spend. This logic is flawed; retirement spending math simply does not work that way.

To start, “good” mutual funds are hard to find before the fact, so the idea that you can easily pick a market-beating fund is unsupported. The best performing funds historically do not tend to go on to be the best performing funds in the future.

The Standard and Poor’s SPIVA U.S. Persistence Scorecard illustrates the point. With a starting sample of 527 top-quartile funds, exactly 0% of them remained top quartile over five years. Similar data are available for Canada, though the sample is much smaller.

The case is similar with country returns. Ramsey references the returns of the S&P 500 as being a little below 12%, but, again, the phenomenal historical performance of the S&P 500 does not tell us much about expected returns.

The 2023 paper “Is The United States A Lucky Survivor: A Hierarchical Bayesian Approach” finds that the realized historical risk premium on U.S. stocks exceeds the expected premium by 2%. This premium is approximately equally split between contributions from luck, where cash flows ended up being higher than expected due to disasters that did not materialize, and learning, where investors lowered their required return on U.S. stocks over time as catastrophes did not happen, driving up the stocks’ valuations.

With U.S. valuations where they are now, there is a strong argument that expected returns for U.S. stocks are far below their historical returns. Earning high returns in the future is not as easy as picking the best performing country of the past.

Since we can’t pick winning funds or winning countries before the fact, a more sensible approach to planning for retirement is using the return experiences of countries around the world to gain an understanding of possible retirement outcomes.

This has been done in at least two papers: “The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets” (2023) and “An International Perspective on Safe Withdrawal Rates from Retirement Savings: The Demise of the 4% Rule?” (2010). The broad conclusion of both is that even 4% is too high to be safe for most retirees; a number around 3% — or lower — could be considered safe.

The other problem with Ramsey’s 8% spending claim is that even if we could find a fund that returns 12% on average, it would not sustain an 8% withdrawal rate because stock returns are volatile. A 12% average return will consist of big ups and downs, and inflation similarly goes through higher and lower periods.

Constant inflation-adjusted spending during consecutive down years, or years of high inflation, can deplete a portfolio quickly. A mutual fund that returned about 12% per year since 1935, the American Funds Investment Company of America, helps make the point.

The fund returned an impressive 11.73% annualized from 1934 through October 2023. Using its historical performance to test an 8% withdrawal in the first year followed by annual inflation adjustments over a 30-year period — a constant real $80,000 in spending — yields a success rate of a little more than 50%. This means that in around half of simulated trials, the client ran out of money before the end of the 30-year withdrawal period — not exactly safe.

At a more palatable 5% failure rate, the safe withdrawal rate for this fund would be about 4.6%, slightly higher than the 4% finding from Bengen, which makes sense since we are using a fund that we know, after the fact, has slightly outperformed the U.S. market.

In any case, the reality is that most clients will be best served by some form of variable spending strategy that responds to year-to-year changes in portfolio values and expected returns, rather than the type of constant inflation-adjusted spending suggested by safe withdrawal rate research.

For clients who may have heard Ramsey argue that 8% is a safe spending rate for retirees, the answer is, in no uncertain terms, no, it’s not.

Ben Felix

Planning and Advice

Ben Felix, CFA, CFP, CIM, is a portfolio manager and head of research with PWL Capital Inc., as well as co-host of the Rational Reminder podcast.

Clients don’t leave because of poor investment performance. Overwhelmingly, they leave because of a weak relationship, says a financial psychologist.

Daniel Crosby, chief behavioural officer with Nebraska-based Orion Advisor Technology LLC, spoke Wednesday at the annual FP Canada Financial Planning Conference about how financial advisors can build stronger relationships with their clients.

When people don’t trust their advisors, they are less likely to follow their advisor’s advice, Crosby said: “There’s this big gap between knowing what to do and actually doing the right thing.” Almost nine out of 10 clients leave their financial advisors because of a poor relationship, according to the 2003 book A Millionaire’s Advisor by Russ Alan Prince and Brette Van Bortel.

Crosby laid out a five-step process for financial advisors to build a connection with clients and deliver advice in a way that sticks.

1. Develop empathy

The more you let the client talk about themselves, the more likeable they will find you, Crosby said. However, he found that advisors tend to talk 75%–80% of the time in the typical model, where the client is a “humble peon who has come to the wise wizard.” He suggested advisors restructure their meetings to let clients do 65%–70% of the talking.

Clients fear that their advisors will judge them for poor financial decisions, Crosby said. But advisors should express curiosity about why clients made their decisions instead.

2. Normalize behaviour

“No behaviour is irrational when you know someone’s story,” Crosby said. Decisions that may seem irrational to a financial advisor will make more sense when they understand the emotional basis for the choice.

If a financial advisor tries to change a client’s feelings about an investment with facts and figures, the client might respond by clinging to their old way of thinking, Crosby said. “We cannot jump straight to criticism. We have to normalize … and understand why someone is engaging in the behaviour,” he said.

3. Look for purpose

Financial advisors can use people’s tendency to look for purpose and meaning to help them set long-term goals, Crosby said. For example, a study conducted by SEI Wealth Network during the 2008 financial crisis found that 65% of people who had a goals-based approach made no changes to their portfolios, while 50% of those with a traditional financial plan decided to fully liquidate their portfolios.

If a client wants to save up for their children’s education or their own retirement, advisors can use that purpose to help motivate them, Crosby said. “Let the purpose do the hard work … because the truth is you cannot solve an emotional problem at the intellectual level.”

4. Provide proof

Once an advisor has determined a client’s emotional motivations regarding finance, the next step is to use the human desire for “social proof” to shape behaviour, Crosby said. He categorized social proof into four areas: statistics from research, opinion from the client’s peers, advice from experts in the field and testimonials from the advisor.

“Planners can actually use this herd instinct to good effect by bringing in multiple points of view,” Crosby said. For example, advisors could provide actionable advice followed by citing studies from universities like Harvard and successful investors like Warren Buffett.

5. Reinforce success

Advisors should give clients some homework to make the relationship feel like a partnership, Crosby said. “We want them to take some initiative, and we know that a behaviour in motion tends to stay in motion.”

The advisor can divide assignments into incremental steps, where the first step is so small that the client cannot possibly mess it up, he suggested. This will help the client slowly come around as they realize they are capable of producing the desired financial behaviour.

Bring a strong close to each client meeting

People remember the first and last part of every interaction best, Crosby said. Therefore, advisors should close each meeting by reminding clients why they want to do something and how the process aligns with their goals.

“It’s only after we connect with our clients on an emotional and a relational level that we’re going to have any sort of bandwidth to do the rest of the work,” he said. “Facts only matter when our clients understand the purpose that they serve.”

Jonathan Got

Jonathan Got is a reporter with Advisor.ca and its sister publication, Investment Executive. Reach him at jonathan@newcom.ca.

When it comes to inheritance, boomers and millennials aren’t seeing eye to eye.

A recent survey conducted by Ipsos for Sun Life revealed that boomers are intending to leave a much greater inheritance than millennials are expecting to receive.

The survey found, on average, that boomers who intend to leave 100% of their inheritance to their kids are planning to give around $940,000. In contrast, millennials are expecting about $309,000.

This gap widens even further when baby boomers work with a financial advisor, as they are expected to leave over a million dollars.

However, of the 44% of boomers surveyed who plan to leave an inheritance, the survey found that less than half (47%) have an estate plan and one-quarter (26%) have not discussed their plans with the intended recipient.

“Receiving an inheritance presents a huge opportunity for millennials whose generation has faced immense economic pressure including volatile interest rates and exorbitant housing costs,” said Brian Burlacoff, an advisor at Sun Life. “It’s important for boomers and millennials alike to have transparent conversations about estate planning.”

The survey is based on an Ipsos poll conducted between Aug. 30 and Sept. 1 that included a sample of 750 millennials (aged 27-42) and 750 boomers (aged 58-77).

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.

The world of financial advice is becoming increasingly complex with new regulations, new technology and new client expectations. Building a meaningful relationship with clients can mean the difference between success and failure. In this respect, understanding our brains and how we interact with the world around us is critical.

I recently had an interesting discussion with author and neuro-management expert Dr. Carlos Davidovich. We talked about his latest book (Five Brain Leadership: How Neuroscience Can Help You Master Your Instincts and Build Better Teams, co-authored with Jennifer Elizabeth Brunton) and how it applies to financial advice.

The reptilian brain

The “reptilian brain” is the oldest and most primitive part of our brain, responsible for our survival instincts. In financial affairs, this brain often takes the reins, triggering instinctual reactions such as greed and fear (or flight vs fight) in response to market movements. Understanding these instincts is the first crucial step in managing our clients’ responses to market sell-offs, for example, or to the fear of missing out.

The emotional and rational brains

Next, there is the interplay between our “emotional brain” and our “rational brain.” These two components act as a “dynamic duo,” with one focused on emotions and the other on logic. As much as we like to think that we are rational decision-makers, emotions play a significant role in influencing our actions and choices — particularly in financial decisions. In fact, research shows that without our emotional brain, we would be less decisive, not more.

Therefore, it’s imperative for financial advisors to understand the emotional triggers that affect clients’ decisions. For example, losses suffered in the 2008 global financial crisis might be an emotional trigger for investors facing new market turmoil.

The heart and gut brains

While the “heart brain” and the “gut brain” may not be as commonly discussed, they hold unique insights into our decision-making processes and can provide valuable perspectives on client behaviour, adding depth to our advisory capabilities.

Evidence shows that there are hundreds of millions of neurons in both our hearts and our guts. In fact, we often rely on our guts but feel embarrassed to say so and search for a rational explanation to support a gut decision. The reality is that, as researchers like Dr. Gerd Gigerenzer have shown, what we call gut instinct is often the result of experiences that we simply cannot translate into words.

For example, if you ask a Major League baseball player how he knows where to run to catch a fly ball, he couldn’t explain it, according to Gigerenzer. What the player is doing, though, is observing the initial angle of the ball and running to keep that angle constant.

This doesn’t mean that these “brains” should overrule the dynamic duo, but they also shouldn’t be ignored.

Observing ourselves

Understanding these five facets of our brains isn’t straightforward. It requires a skillful blend of attentive listening and a willingness to challenge our personal biases and assumptions. Dr. Davidovich refers to this practice as “metacognition” or self-awareness. By observing ourselves from an external perspective, we empower ourselves to maintain composure, make more informed decisions and respond effectively to the needs of our clients.

The role of trust in turbulent times

During market volatility, when the “reptilian brain” is likely to be in control, trust emerges as the linchpin of successful advice. Advisors who have meticulously nurtured trust with their clients in calmer markets are better equipped to guide them through turbulent market conditions, give them confidence and inspire discipline.

By recognizing and effectively managing our different brains, advisors can enhance their decision-making and communication skills. In the intricate world of financial advice, understanding the subtleties of our five brains can help us be the trusted advisors that clients are seeking, particularly clients who are new to investing. It’s a path to building trust, helping clients make more informed decisions and achieving enduring success in the changing world of financial advice.

Sam Sivarajan

Planning and Advice

Sam Sivarajan is an independent wealth management consultant and behavioural scientist.

“We need to talk” are the four words no financial advisor wants to hear from a client.

But by the time the phone rings, it’s often too late to salvage the relationship — the decision’s been made, the paperwork’s signed and the investments are moving to another advisor.

“The honest truth is that no one advisor is a fit for every client,” said Jason Pereira, a senior partner and financial planner with Woodgate Financial in Toronto. “Sometimes, we can acknowledge that they’ll be better off with someone else. Remember that it’s their money and they can do whatever they please.”

That doesn’t mean advisors shouldn’t ask questions.

John Cucchiella, partner with First North Consulting in Toronto, recommends engaging with a client once an advisor learns they’re leaving. “Consider it an exit interview,” he said. “Learn from yourself and be humble about it.”

A departure can be easy to take personally — Cucchiella said he still remembers the name of the first client who left him. “I was floored and I was hurt. Because you’re so invested, right?”

But, after Cucchiella finished licking his wounds, he and his team talked about what they missed and what could have been done better.

“You start to triage your practice and understand where the gaps are,” he said. “And then you hope to correct it, and you’re better for it once you come out of the other side.”

Pereira agrees that asking the client why they’re leaving can be educational.

The reason for the departure “might be a legitimate complaint [but] beyond the scope of your control,” he said. “If they’re complaining they haven’t made much money in the last 24 months, well, no one controls the market.”

Finding out what they’ve been told or promised by their new advisor can also be helpful.

Often, the client will have been offered better returns and performance — which Pereira said is a bit disingenuous because “anyone can just pick a number out of thin air and say he could have done better.”

“No one can guarantee you what they did previously,” Pereira said. He likes to ask a lot of questions of clients on the way out the door to ensure they haven’t been “sold a bag of goods” or promised something that isn’t possible. If that’s the case, showing your math might help explain why the pastures aren’t greener with another advisor.

In other cases, the client may not be aware they’re moving — a scenario that recently played out for Pereira. Paperwork landed to move a client’s assets and he called the client to find out why. “He was like, ‘What are you talking about?’ He wasn’t moving. He didn’t mean to,” Pereira said.

That client had been at his bank and signed some documents without realizing their nature. “Maybe that was in error or miscommunication, or maybe it was on purpose,” Pereira said. “But the reality is that there are cases where the client doesn’t even know what they’re signing.”

More commonly, Cucchiella said, clients don’t bother telling their advisor they’re leaving.

“Clients, generally, don’t want to have that conversation with you,” he said. “Usually, you just get surprised with a transfer document.” Further, the new advisor will often coach the client not to talk to their old advisor for fear that they may be talked out of moving their assets.

Warning signs

While blindsides can happen, there are usually signs that something is wrong in the relationship. “It feels perhaps a little more cold; there isn’t the engagement that there once was,” Cucchiella said. “Perhaps the client isn’t returning calls anymore.”

A big red flag is when clients stop heeding your advice or begin liquidating their positions without a clear reason.

To avoid getting to that point, advisors should be proactive about communication.

“If your spouse goes silent on you, do you just forget about it? It’s no different here,” Cucchiella said.

He encourages advisors to reach out and find out how everything is going.

An advisor can say, “I’m getting a sense that our relationship is kind of drifting here,” Cucchiella suggested. “Am I misreading this or is there something going on that I need to understand?”

Tax practitioners say the federal government’s proposed new alternative minimum tax (AMT) regime may discourage philanthropy by punishing people who make large charitable donations. 

“The fundamental concern about these changes is they treat charitable donations as tax evasion or personal expenditure,” wrote Malcolm Burrows, head of philanthropic advisory services with Scotia Wealth Management, in a Sept. 21 article on All About Estates. 

While Ottawa may have good reason to target aggressive tax planning and tax evasion, “charitable donations are different,” said Burrows, who is a founder of the Aqueduct Foundation, a donor-advised fund managed by Scotia Trust. “Donors make irrevocable gifts to benefit charity and the community. They reduce their wealth by doing so.” 

In the 2023 federal budget, the government proposed increasing the AMT rate to 20.5%, up from 15% under the existing AMT regime. The AMT exemption level would increase to an estimated $173,000 (indexed annually) from a fixed $40,000. The changes are meant to take effect Jan. 1, 2024.

Ottawa hopes the changes will ensure the highest earners cannot combine certain incentives in the Income Tax Act, including the donation tax credit, to drive their tax rate below a minimum rate. 

Among other proposed changes, only half of the donation tax credit can be applied against the AMT, down from 100% under the current rules. Meanwhile, 30% of capital gains on the donation of publicly listed securities will now be included in adjusted taxable income (ATI). 

The AMT proposals “are expected to affect very few taxpayers” due in part to the significant increase to the basic exemption amount, wrote tax and estate experts Jamie Golombek, Debbie Pearl-Weinberg and Kate Lazier in a Sept 2023 CIBC Private Wealth report. 

In addition, “high-income donors generally won’t pay AMT no matter the size of a cash donation if they earn primarily (self) employment or rental income,” the authors stated. 

However, if a client realizes a large capital gain — such as from selling a business — and makes a significant donation, their AMT under the proposed regime may increase relative to the existing regime. The AMT could also increase if the client generated dividend income and made a large cash donation. 

In a Sept. 21 webinar about the AMT presented by Toronto-based Oberon Capital Corp., Kim Moody of Moodys Private Client in Calgary presented a hypothetical scenario of a B.C. client who had $500,000 in capital gains and $250,000 in eligible dividends in 2024, and who chose to donate $300,000 cash that year. Under the proposed regime, the client would owe AMT of $48,995 as opposed to none under the existing rules. 

Citing calculations provided Jay Goodis, a CPA and CEO and founder of Tax Templates Inc. in Aurora, Ont., Moody said the same client could reduce their AMT to zero under the proposed rules if they donated just $3,060. 

“I find that, just from a [tax] policy perspective, very, very offensive,” Moody said. 

Henry Korenblum, vice-president of sales and tax planning at Oberon Capital, said during the webinar: “You’re going from a $300,000 donation to basically nothing to wipe out the AMT, even though the donation is genuinely impoverishing you. It’s not as if you’re consuming something — you’re making a donation to some charitable activity, something designed to promote universal good.” 

Under the proposed rules, the AMT will remain recoverable to the extent regular income tax exceeds AMT in any of the following seven calendar years. 

However, if the taxpayer doesn’t earn enough employment income in any of those seven years, the tax loss may become permanent, said the authors of the CIBC report. 

“In addition, AMT recovery may be further impacted by a gift to charity because the individual can no longer earn income on the gifted property,” they said.

In its Sept. 1 submission to the Department of Finance, the Canadian Association of Gift Planners (CAGP) argued that the proposed AMT rules could jeopardize the donation of “transformational” gifts in the six- to nine-digit range. These gifts represent 35% of the annual $11.8 billion in charitable giving by Canadians, the CAGP said. 

To the degree the proposed rules might discourage large donations, “charities and Canadians will look to government to replace this funding in order for vital programs and services to continue,” the CAGP said. 

Tax practitioners suggested clients talk to their tax advisors regarding ways to make large gifts while limiting the negative effect of the proposed new AMT regime.  

For example, clients could consider making large donations before the end of this year rather than in 2024. Observers expect the federal government to introduce enabling legislation in Parliament to implement AMT changes sometime this fall. 

Clients might also consider donating via a will or through a private corporation, as the AMT does not apply at death or to a corporate donor, suggested the CIBC report. 

The Department of Finance released draft legislation on Aug. 4 to implement the AMT proposals, and the consultation period ended Sept. 8. 

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.

While Canadian home prices have soared over the last decade, traditional retirement planning rarely takes home equity into account, focusing instead on other assets. Research funded by the Canadian Foundation for Financial Planning (formerly the FP Canada Research Foundation) sought to find out why.

Vishaal Baulkaran, associate finance professor at the University of Lethbridge’s Dhillon School of Business, and Pawan Jain, assistant finance professor at West Virginia University’s John Chambers College of Business and Economics, surveyed Canadian consumers and financial planners about their understanding and use of home equity release schemes (HERS).

These schemes include home equity lines of credit, second mortgages, refinancing homes, downsizing, selling a home and then renting, and selling a home and then leasing it back for life.

While Canadians are living longer in retirement, only a small proportion are dipping into home equity for income. When they do, the report found, it’s more often to cover financial hardships such as care or nursing.

The report warned that the issue of insufficient retirement income may be exacerbated by “a large portion of retirees’ assets” tied to their illiquid personal residence.

“Individuals who want to ‘age in place,’ with the right knowledge and information, can choose to unlock home equity while continuing to enjoy the comfort of their house,” the report said.

While planners said they’re comfortable providing advice about HERS, their preferred recommendation is to sell investments for extra income in retirement.

The report said some barriers to using home equity could be behavioural. On the client side, these include the products’ perceived complexity and personal attachment to their homes.

For planners, the authors noted the prevalence of mental accounting, or viewing the client’s home as a separate asset from the rest of their retirement assets.

“Financial planners with mental accounting bias use arbitrary classifications to put different assets in different buckets, leading to suboptimal asset allocation,” the report said.

“Such biased financial planners might put their clients’ residential properties in a ‘safe’ bucket and might advise against using these properties for funding retirement.”

The report didn’t mention conflicts of interest, but the risk of a perceived conflict could also be a factor, since freeing up home equity will often mean more assets for a financial planner or advisor to manage.

For the study, the researchers surveyed 1,200 Canadian consumers and nearly 500 financial planners who hold the CFP or QAFP certification.

Mark Burgess

News

Mark has been the managing editor of Advisor.ca since 2017. He has been covering business and politics for more than a decade. Email him at markb@newcom.ca.

The quandary

Your client is in her mid-80s and in relatively good health except for mobility challenges. Her power of attorney (PoA) is her daughter.

Your client tells you she fears that her daughter wants her assets. She says the daughter is creating conflict among family members, leaving your client feeling isolated and anxious. Meanwhile, the daughter phones you to say her mother has been diagnosed with Alzheimer’s, though your client seems capable to you. Further, the daughter is unhappy with recent portfolio performance and asks you to invest her mother’s assets more aggressively. How do you proceed?

The experts 

Kathryn Wright Financial planner, Wright Wealth Strategies Inc., Kingston, Ont.

I’m not comfortable taking instructions from someone purporting to be the owner of assets just because they say the power of attorney was invoked. I need proof.

What the client shared about her daughter could be a sign of elder abuse. I want to be the person who believes the client, asks questions, and suggests courses of action.

Covid-19 made clients more open to discussing tough topics. I’m insurance-licensed, so I have conversations about death all the time, and I talk to clients about estate planning and planning for incapacity and disability.

This client has mobility issues, so I want to know where she lives and what support she has. Covid made people more conscious of the elderly who are alone and isolated, so more community support is available, including elder abuse awareness and prevention. Clients also adapted during the pandemic to address isolation — I have 90-year-old clients who love Zoom.

I would ask the client if the daughter lives with her, or has plans for her care or living arrangements, and where other family members live.

I’d also ask how old her will and PoA are, including PoA for personal care. Do the will and PoA reflect changes arising from the pandemic? If the client is concerned about the daughter as PoA for property, would the client like to speak to her lawyer?

When it comes to dementia, I try to alert myself to issues by testing a client’s capacity during every conversation: Is this the same person I talked with at the last meeting? Dementia is a continuum, and the daughter in this case may be preventing that continuum from playing out naturally, with her mother remaining capable for some time during her illness.

Best practices include having clients name trusted contact persons, and I would have already discussed with the client who I can talk to if I notice a problem.

When I raise the issue of a trusted contact, I tell the client that I’m trying to protect them. I outline their personal circumstances and make it all about them. For example, if the client’s children live far away, we discuss who else the client sees regularly and trusts.

I may have had concerns even before the client told me the daughter wants her assets. Chances are I’d have had meetings with both of them, so I’d already know if the daughter coached or pushed her mother before the PoA was in effect. A red flag is when a client’s child calls me before a PoA is triggered and says, “I need to change how my estate is being handled.” With higher interest rates, a lot of people can’t service their debt right now, so elder abuse is only going to get worse.

Another red flag is when the client’s circle of support refers to a different lawyer or doctor than they previously had. Was the power of attorney written in the last month using a new lawyer?

When I identify concerns, I meet my client in person and also arrange a family meeting with an agenda to discuss the client’s wishes and confirm the power of attorney document. If you put the client’s needs first, that allows you to sleep at night and know you’ve done the right thing.

Lisa Feldstein Principal lawyer, Lisa Feldstein Law Office Professional Corp., Markham, Ont.

The advisor needs to figure out who they’re taking instructions from: Is my client capable or not? Is a power of attorney in effect or not?

Just because a client is well groomed and articulate doesn’t mean they’re fine. And if a client has dementia, they don’t necessarily lack capacity; it’s a progressive illness.

For the financial advisor to be satisfied that the client is capable, a brief conversation isn’t enough. A meaningful conversation is required to probe the client’s logic, decision-making and memory. For example, are you having the exact same conversations with the client repeatedly?

If the client seems capable currently and there is in fact a diagnosis of Alzheimer’s, the advisor should be vigilant about identifying any out-of-character behaviour in future, such as bad judgment and poor decisions. This may mean having in-person meetings.

It would also be prudent to ask the client for the PoA document. Just because someone says the document exists does not mean it does. Or maybe the document exists but the daughter wasn’t appointed attorney, or more than one family member was appointed. If the client doesn’t have the document, the advisor may want to ask the daughter about it, informing the client before doing so. The advisor could also ask the client if she’s comfortable having a family meeting.

When issues with dementia arise, a client’s family members may worry about a lack of due diligence. An advisor can reassure them by saying, “I’ve heard you, and I’m making a note on the file. Thank you for bringing these issues to my attention so we can figure out next steps.”

A PoA document may include details about a triggering event (depending on the jurisdiction) and limitations to authority. When a triggering event is specified, the language is usually related to a capacity assessment by a doctor, not a specific diagnosis.

If no PoA is in effect, then the advisor doesn’t take instructions from the daughter. If the advisor confirms that the daughter is the PoA, the advisor may want to suggest she speak with a lawyer to understand her duties and to avoid exposing herself to liability (for example, she could mismanage funds and then be sued by beneficiaries). There are laws that guide how to make decisions as an appointed attorney under a PoA. Ontario, for example, has the Substitute Decisions Act.

The advisor can also help educate the daughter about finances; maybe she’s not financially savvy and is open to advice.

If, however, she doesn’t accept advice and the advisor is uncomfortable with her instructions, the advisor should document the situation. The advisor can also consider getting the daughter to acknowledge, in writing, that she wants to proceed without advice. This waiver would include specifics about the advice, rationale behind it, and the consequences of not following it. This would help her understand the significance of the circumstances, as well as reduce the advisor’s risk.

If the relationship can’t be remedied and breaks down, the advisor can consider a transition to another advisor, making that transition easier by providing a referral (in some circumstances, another professional may be a better fit) or documents. The advisor should also document the relationship breakdown.

It’s helpful for financial advisors to talk with clients about potential incapacity before it happens — whether from Alzheimer’s or an accident. Discuss PoA, who the client trusts, and what their wishes are so you can honour those wishes and respect the client’s autonomy. Planning ahead changes the context: the advisor avoids an ethical scenario and instead follows an action plan.

Michelle Schriver

News

Michelle is Advisor.ca’s continuing education editor. She has worked with the team since 2015 and been recognized by the National Magazine Awards and SABEW for her reporting. Email her at michelle@newcom.ca.