How Can We Identify Undue Influence in Our Elderly Clients?

A long-time client, Mr. Lee, stops in without an appointment to discuss an “important” financial opportunity he recently heard about. Mr. Lee is 80-years old and a widower. You’ve been his broker for about 15 years. He had always been a conservative investor, but he enjoyed coming in, sitting down and discussing different investments with you and keeping a close eye on his funds. You are aware that he had a health crisis in the past year and hasn’t been in touch as often. At this most recent visit, he seems more withdrawn, uses a cane, and appears to have aged considerably since the last time you saw him. He specifically asks about strategies to move funds out of long-term investments and into his checking account. He’s not able to provide a clear rationale for the necessity of these transactions. You warn him about significant penalties and fees, as well as tax implications and he leaves the office to think about it.

A few days later you get a call. Mr. Lee says he thought about it and is ready to move ahead. You think you can hear someone in the background “coaching” him on what to say. You try to schedule an in-person appointment, but he insists on doing it “over the phone”.

Twelve months later, Mr. Lee’s adult children call your office. As the heirs and beneficiaries to his estate, they are claiming that their father was the victim of undue influence and fraud and are pursuing FINRA complaints against your financial institution for negligence.

Definition:

So what is Undue Influence? Undue Influence is not a diagnosis per se, but rather refers to an uneven relational dynamic that places an older person at increased risk for excessive persuasion and causes them to act against their own self-interest. Undue Influence is the driver behind many cases of financial exploitation and fraud, and older adults don’t have to be suffering from dementia to be a victim. For example, although he had some health problems, Mr. Lee did not appear to have any serious cognitive impairment. He was still susceptible to undue influence. So this legal argument can be used even in cases where the older victim has intact “capacity”.

Most Undue Influence frameworks emphasize 4 key criteria.

The first criterion is the vulnerability of the victim, which includes medical and psychological conditions.

The second criterion is the relationship with the influencer. Undue influence occurs in a relationship where the influencer has power and often has a confidential or trusting relationship. The authority can be formal such as a physician or financial advisor, or informal, such as a family member, caregiver or neighbor.

The third criterion is the tactics employed to persuade or dominate the victim. Influencers often take steps to actively take advantage of the alleged influenced individual. These may range from isolating the senior from others, reinforcing dependency, initiating / actively procuring legal documents, and many others. There may also be an element of secrecy or inappropriate timing (same day as a hospitalization, shortly after a loss) that favors the influencer.

The fourth criterion is that it results in monetary loss. Undue Influence results in financial losses for the victim and financial gain for the influencer. An unfair outcome may be a transaction that is below market value benefiting the influencer. However, an uneven outcome that is a clear deviation from previously stated results in the context of suspicious circumstances may rise to the level of undue influence.

While typically undue influence is cited in contests about wills and trusts, it can also be raised on any contractual agreement. These types of scenarios are becoming increasingly common. Advisors who benefit financially from the “influenced” transactions, or who knew about the risks or who should have known about the risks, may be liable for damages.

We will now focus on how to spot undue influence in potentially vulnerable clients and put protections in place to guard against it.

So what does Undue Influence Look Like? As said before, undue influence occurs in a relational dynamic. Common scenarios can include:

¤ A new romantic relationship, where a new love interest begins to accompany the older client to financial appointments and insert themselves into financial planning in a manner that’s inconsistent with the client’s prior preferences or that is not in the client’s best interest.

¤ A caregiver / dependent adult relationship. The caregiver can be a paid caregiver or a family member or friend that steps up to assist the client at first but then tries to take over.

¤ Undue influence can also include “chipping away” at an established financial or estate plan. These small changes add up to big inequality over time favoring the alleged influencer.

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So when are older adults particularly vulnerable to Undue Influence? After any major life transition, health event, or loss. Influencers often target people when they are grieving the loss of a spouse, recovering from a medical procedure, or moving into a new living situation because they require care. Socially isolated adults are particularly at risk.

For example, Mr. Lee had observable signs of vulnerability. He appeared older and frailer and had experienced a major health crisis in the past year. He had also lost his spouse and was alone. While he still appeared “sharp,” Mr. Lee was significantly more vulnerable than before.

Changes in habits can also indicate Undue Influence. In the past, Mr. Lee had always scheduled appointments and had never stopped by without one. He preferred visits in person and never asked to transact business over the phone. He also was a conservative investor, well aware of the risks of premature withdrawals and tax implications.

So what should you do when you see red flags for undue influence?

Undue influence is a tool of elder financial elder exploitation. Most financial institutions will have a procedure that employees are required to follow when identifying potentially abusive situations that may include reporting to local authorities. But in the moment, here are some action steps you can take:

1. Slow down the questionable transaction. Delay by explaining the risks of the request and ask the client to take a few days to think it over.

2. Invite a neutral, trusted third party to attend a financial planning appointment. This individual could be the client’s estate planning attorney, accountant, or a trusted friend or family member. Make sure that the person you invite is not the influencer.

3. If the client brings the alleged influencer to a meeting, try to separate them so that you can have a private conversation with your client. Recruit help from other colleagues to engage the influencer in a side conversation or to complete paperwork while you share your concerns with the client.

4. Talk to a colleague, supervisor, or compliance officer prior to going ahead with and suspicious requests. Get more professionals involved in the decision making so that you aren’t dealing with a sensitive issue alone.

5. Flag the client’s account so that if a different advisor or administrator gets a call from the client or the influencer, they can be aware of the situation and can proceed with caution.

6. Document, document, document! You may be called on later by authorities to provide evidence that the client was or was not a victim of undue influence.

In summary, it is important to identify transactions that potentially are the result of undue influence and take steps to minimize the risk of others manipulating your client to benefit themselves. If these steps are followed, client autonomy and wishes will be respected, but in a manner that is ethical and mitigates risk to all parties.