Diminished Capacity and a Suspicious Wire Request
Harold, 82, has a $1.1 million advisory account. His daughter, Karen, calls and says Harold was diagnosed with early-stage dementia and she holds his durable power of attorney. She wants you to liquidate $300,000 of municipal bonds and wire the proceeds to a new account in her name to 'protect the family assets from a lawsuit.' Harold has not called or emailed. The account's standing instruction requires all requests to come directly from Harold. Karen is not a named beneficiary; Harold's will leaves his estate to his three children equally. The bonds have a $40,000 unrealized loss. Your firm's policy requires a reasonable belief in client capacity and verification of any power of attorney. Karen is impatient, says Harold signed the POA two years ago, and insists the transfer is urgent.
1. What steps must you take before acting on Karen's request? Discuss capacity, POA verification, and red flags for financial exploitation.
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First, do not act on the phone request. The standing instruction requires Harold's direct authorization. A durable power of attorney is a legal document, but the adviser must verify it is valid, current, and specifically grants authority to make withdrawals or transfer assets. Contact Harold directly using a known phone number, not one Karen provides. Ask open-ended questions to assess capacity: what year it is, who the president is, whether he understands the transfer. If capacity is uncertain, involve the firm's compliance and legal departments. Red flags: Karen wants funds in her own name, not Harold's; the stated purpose is to shield assets from a lawsuit, which may be fraudulent conveyance; she is impatient; Harold has not communicated; the transfer is a large portion of the account; and there is a loss harvest that could be legitimate but is paired with a suspicious wire. Document everything.
2. How should you handle the request to liquidate and wire funds? What alternatives and documentation are appropriate?
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Do not liquidate or wire until the POA is verified by counsel and Harold's capacity is confirmed. If Harold is capable, get his written authorization for the specific transaction. If he lacks capacity, the POA may permit Karen to act, but the adviser should still ensure the transfer is for Harold's benefit, not Karen's. A transfer to Karen's individual account is not for Harold's benefit and should be refused. Alternatives: keep the bonds in Harold's account, set up a joint account with right of survivorship if appropriate, or use a revocable trust. If exploitation is suspected, the adviser may place a temporary hold on the disbursement and report to adult protective services under state law. Document the POA, the capacity assessment, the client's instructions, and any refusal. If Karen persists, escalate to compliance and legal.
3. What are your obligations if you suspect financial exploitation?
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Many states have mandatory reporting for financial exploitation of elders or vulnerable adults. The adviser should follow firm policy, which may require reporting to the state adult protective services and possibly to state securities regulators. The adviser should not tip off the suspected exploiter. A temporary hold may be permitted under state law or firm policy. The adviser should also consider whether a trusted contact person is on file. Document the suspicion and the report. If the client is capable, respect his autonomy but educate him about the risks. If not, act in his best interest. The key is to avoid both acting on a suspicious instruction and abandoning the client.