Detecting and Preventing Financial Exploitation and Mastering Powers of Attorney

Intro (00:00):

This is Advisor Intelligence, the podcast for investment advisors and financial institutions. In each episode, attorneys from your investment management and securities team break down compliance, regulation, and risk into practical insights that help you stay exam ready and ahead of what’s next. This podcast is brought to you by Stark & Stark.

Joseph Antonakakis, Esq. (00:28):

Hello, and welcome back to Advisor Intelligence. My name is Joseph Antonakakis, and I’m joined today by Ron Minsky and Stephen Galleto. Today, we’re going to discuss financial exploitation of vulnerable clients, including elder abuse of elderly clients, and the importance of maintaining trusted contact information for your clients. And the reason why we’re talking about this today is because it’s something that we talk about with our clients, unfortunately, on a weekly basis, at the very least. I have clients, Steve, I know you do, and Ron, I know you do as well because we talk about this quite often together. Clients who call us and say, “I have a client who I suspect maybe their children are abusing them financially. Maybe they’re being subjected to some sort of a scam.” Oftentimes, we see things like romance scams, where somebody in a foreign country claims to have a romantic interest in someone in the US.

(01:32):

It also comes in the form of cryptocurrency scams. Somebody might say that they have a hot new investment and somebody in the US wants to invest in this. They think they’re going to increase their investments quickly. And then eventually they go to a point –

Stephen Galletto, Esq. (01:51):

It’s just a get rich quick scheme, right? I mean, there’s no actual market for it. Or

Joseph Antonakakis, Esq. (01:55):

Alternatively, it’s a complete scam. It doesn’t exist at all.

Stephen Galletto, Esq. (01:59):

Right.

Joseph Antonakakis, Esq. (02:00):

And they tell the potential victim, the more they invest, the more they can make. And we’ve seen instances personally, and you see it in the media, instances where people are investing. They think they’re investing hundreds of thousands of dollars, their entire retirement account, into a scam, and they lose all their money. And what we say when we talk to people about this is investment advisors are the first line of defense for their clients when they’re dealing with this type of situation, because advisors have a unique insight into a client’s financial life that nobody else has. An investment advisor’s going to know when clients are withdrawing large amounts of money. Investment advisor is going to get a call from the client when they want to send money to a foreign country the client’s children or spouse don’t even know about. So it’s an incredibly important subject.

(02:55):

So we’re going to talk about these things, what they look like, what the red flags are, and what to do. When you need to contact a trusted person, when you might need to contact a state regulatory agency, how to talk potentially clients out of falling for these types of scams.

Ronald Minsky, Esq. (03:13):

Joe, you mentioned that the advisor is the first line of defense. Another piece to that is not just that the advisor knows the client’s finances, but the advisor typically knows the client’s family and the client’s close confidants. And that’s where a lot of these exploitations occur. It’s not necessarily just looking for the transactions. It’s looking at the behavior of the client. It’s looking at the behavior of the people that the client holds in close circles that a lot of times gives you the clues that exploitation is occurring or about to occur.

Joseph Antonakakis, Esq. (03:51):

Yeah. And we tell people, we have an entire section in the policy manual that we draft for many of our clients. We’ve got hundreds of clients across the country and we help them draft their policy manuals. And some of the recommended language that we recommend to folks for their policy manuals is specifically outlining red flags of elder abuse and financial exploitation. Why don’t we just give maybe a couple examples of elder abuse or incapacity? What types of red flags exist?

Stephen Galletto, Esq. (04:23):

As clients age, you will see your client withdraw from the conversation sometimes. They won’t really want to be part of the conversation going forward. Either they can’t hear and they don’t want to tell you that they can’t hear. They can’t remember what it is you told them a week or a month or six months ago. And they’re embarrassed. They don’t want to acknowledge that they are experiencing some sort of reduction in their ability to participate. So they may just withdraw from the conversation entirely. But before we get to that, you might see that the client is asking the same question over and over again. You might see that the client doesn’t remember what you told them two or three weeks ago. They could have trouble responding to an email that they normally had no issues at all responding to. You can tell when somebody starts to lose a step or two.

(05:15):

Doesn’t necessarily mean that they’re – Incapacitated. Incapacitated or could be deemed incompetent and therefore you can’t take direction from them anymore. That’s why we typically recommend that investment advisory firms have a trusted contact form on hand. What does the trusted contact form do? It gives you as the investment advisor, somebody that you can reach out to and that you can share your concerns with. Let’s say for example, mom is the client. We have a son and daughter, both as trusted contacts. Advisor has a longstanding relationship with mom. Trusted contact has been on file for the past five years or so. Advisor starts noticing that mom is having a little bit of a hard time remembering conversations, forgets things, doesn’t show up to meetings with all the information that she was prompted to show up to. Maybe we use the trusted contact form to reach out to son or daughter and say, “Hey, mom could use an extra set of hands.

(06:10):

Mom could use an extra set of ears, maybe some help taking some notes during these conversations.” And hopefully mom chose well with the trusted contacts and somebody steps up and helps.

Ronald Minsky, Esq. (06:21):

What’s just as important with the trusted contact is not just what the trusted contact can do, but also what the trusted contact cannot do.

Stephen Galletto, Esq. (06:29):

Correct.

Ronald Minsky, Esq. (06:30):

A lot of clients may not want somebody injected into their affairs to such a degree. So it’s important that we make them comfortable in the fact that the trusted contact cannot affect any transactions on the account. The trusted contact cannot get any information on the account. The trusted contact cannot change anything on the account. The trusted contact is there as someone that we just want to alert that something may not be quite right.

Stephen Galletto, Esq. (07:02):

Right. Mom typically has regular expenses on a monthly basis and maybe, I don’t know, 5,000 to $7,000 a month withdrawal is normal. Helps to pay whatever bills that mom might incur, doctor’s bills, food, reasonable travel, stuff like that. In addition to that typical five to $7,000 that mom takes out, mom asks for an additional $25,000. And you say, “Oh, are you going somewhere?” You ask the question, right? Because you’re likely friendly with the client if she’s been a long-term client. You’re likely friendly with her and you kind of want to know what’s going on. What do you need the $25,000 for? She gets a little cagey. Well, I just need a little extra this month. Or I don’t want to tell you. Kind of a red flag, right? Okay. It’s not critical. It’s $25,000. Maybe she has a couple of million dollars in her account.

(07:58):

An extra $25,000 comes out. Maybe she just wants to have a hell of a weekend in Vegas. You have no idea. But you start seeing a regular process here. Another month goes by, she needs an extra 50 grand, an extra 75, an extra hundred. And you need to start asking these questions. If you’re spending this money, this wasn’t part of our financial plan for you.

Joseph Antonakakis, Esq. (08:18):

Yeah. When someone starts to deviate from their plan it’s another red flag as well.

Stephen Galletto, Esq. (08:22):

Exactly. So this wasn’t part of our plan. You need to tell me what’s going on here. And mom still doesn’t want to tell you. You have that trusted contact. You could reach out to son or daughter and you could say, look, I’m seeing some excess spending from your mom. Is she sick? Is this for medical expenses? And she just want to tell me that she’s going through cancer treatments or something like that. All totally legitimate reasons for the client not wanting to tell you why they’re taking out extra money and why it would cost substantially more from a month to month basis. Totally fine. Trusted contact might be able to share that information with you and mom won’t. Makes you make you feel more at ease, right? Trusted contact has no idea why mom’s taking out this additional money. Another red flag.

(09:05):

What’s going on here? We need to start figuring this out. Does this mean we can’t continue to service the client relationship? No, it doesn’t mean that at all. Just means we are a little suspicious about what’s going on. So this activity continues to go on. We can draw the line and say, look, you won’t tell us what this is for. You continue to withdraw money from the account. We’re not comfortable with this. You need to let us know. You need to clue us in as to what’s going on. Turns out mom is the queen of some foreign country and she just needs to give the government $400,000 over the next six months in order for her to reclaim her title as queen. Off the wall stuff.

Joseph Antonakakis, Esq. (09:49):

Are you telling me that’s a scam?

Stephen Galletto, Esq. (09:50):

Yes, Joe. I’m sorry to break it to you. You

Joseph Antonakakis, Esq. (09:52):

Mean I’m not the king of Lauritania?

Stephen Galletto, Esq. (09:56):

Cut.

Joseph Antonakakis, Esq. (09:56):

I got to go.

Ronald Minsky, Esq. (09:59):

But Steve makes an important point there. It’s that a lot of these scams, they start out small.

(10:07):

Steve mentioned, oh, maybe it’s just 25,000. Sometimes it’s even just $5,000 at first. And then it’s another $5,000 and then it’s $10,000 as the scammer gains the trust of the client. I’ve seen a number of these, particularly recently, a lot of sweepstakes scams where the client will be told they won sweepstakes. They need to pay $5,000 in taxes or a $5,000 fee in order to claim the $10 million prize. And they’ll pay the $5,000. And then they’ll come back and say, “Oh, well, now we need to pay another fee to process the check.” And it builds and it builds and it builds. A lot of times these do start out small. And that’s why it’s so important to get the trusted contact involved at an early stage. Right.

Joseph Antonakakis, Esq. (11:00):

What you described actually comes up in the investment scams as well where a scammer will ask for 5,000 or $10,000 to start. And then that $10,000, they’ll make it seem like on some software dashboard, they’ll make it seem like it’s grown to $100,000. And then the scammer says, “Well, just send me $50,000 more and that’ll grow to 500,000.” So they send another 50,000. They send another 100,000. They send another 250,000. And then the scam keeps growing and growing. And at some point, when the scammer thinks they’ve got all the money, they cut ties completely. That goes for the investment scams, for the sweepstake scams that you described, for the romance scams, which are all becoming increasingly sophisticated. And I think something that advisors often forget is when they’re in a situation like this and a client is asking them for a lot of money and the advisor reasonably suspects that there’s something wrong, that there’s some sort of scam going on, that they may be subject to some level of financial exploitation, the advisor doesn’t have to act.

Stephen Galletto, Esq. (12:08):

Correct.

Joseph Antonakakis, Esq. (12:08):

The advisor can say no. Exactly like you said. And people forget that all the time. There was an instance I dealt with about a year ago where someone said, “Well, they’re the client. I’m going to follow their wishes. If they want to subject themselves to a scam, let them subject themselves to a scam. It’s their money. They could do whatever they want with it.” And I don’t think you could take it that far and sort of perpetuate the scam. But if you identify the issue and you no longer want to participate, you can tell them, “Listen, our investment advisory agreement allows us to terminate the relationship. We can’t go further. We suspect that there’s an issue. And if you want to continue doing this, that’s fine, but you have to do it on your own and we can no longer deal with it.”

Ronald Minsky, Esq. (12:53):

Joe, that’s an important point you make. And not just that the advisor does not have to act. In some cases, the advisor is obligated not to act on certain transactions. If the advisor suspects that there’s exploitation, some sort of diminished capacity, and there’s a suspect transaction, in many cases, the advisor is not only obligated to not execute the transaction, but the advisor is obligated to report the situation as well. Yeah.

Joseph Antonakakis, Esq. (13:27):

I wanted to discuss that as well. And the reporting requirement comes up often because every state, they all call them something different. Some places it’s the division of adult protection. Every state has a different name for it, but they all have this division. And depending on the rule of the state, advisors may be considered parties who are required to report to that state’s authorities if they believe that somebody is subjected to abuse, financial or otherwise, or if they’re being subjected to some sort of a scam. And clients may argue with that. Clients may say, “Well, I don’t want you to tell anybody that I’ve got this girlfriend in Greece or whatever.”

Stephen Galletto, Esq. (14:11):

Is that hitting a little too close to home?

Joseph Antonakakis, Esq. (14:14):

I’m not going to respond to that, Steve. I don’t want anybody to know about my other relationship. I just want you to send my money as the advisor. And the advisor can say, “I reasonably believe that this is some sort of a scam. And so I am duty bound.” Again, depending on the state, usually it’s a state where the client resides, but advisor may be duty bound to report that.

Stephen Galletto, Esq. (14:40):

So why would an advisor not want to report? I think it’s pretty obvious, right? You’re going to be really upsetting your client, especially if they are full on in to the scam. If they believe it’s true, and then you report this as an issue, now the client feels like you’ve somehow betrayed that level of trust or potentially from their perspective. You breached your fiduciary duty to them by reporting this as a possible issue. This now creates a situation where they need to do something else. But what if you were reporting son or daughter as exploiting mom, right? Your client. A son or daughter is trying to insert themselves. They’ve forged beneficiary change forms or something like that, and they’re inserting themselves. You hear them off to the side while you’re talking to mom who’s the client, coaching mom to ask for money, coaching mom to place certain trades.

(15:36):

And you can tell that mom’s being taken advantage of. Well, if you do report this as possible exploitation and it turns out it’s not possible exploitation, you’re looking at possibly a defamation case against you from the party that you’re representing or party that you’re reporting as potentially taking advantage of your client.

Ronald Minsky, Esq. (15:56):

And it’s not just the defamation. There may be losses or sacrifice gains by not executing certain transactions. What’s important to understand is that with the laws and the rules and regulations that are in place, particularly the Senior Safe Act at the federal level and many state laws that are modeled after the Federal Senior Safe Act, there are liability protections built into these laws for the advisor that acts on good faith and does not execute transactions that they suspect are exploitation or abuse.

Stephen Galletto, Esq. (16:39):

But in order to be able to rely upon that Safe Act, what do you need to do internally?

Ronald Minsky, Esq. (16:43):

You need to report it and you need to document it.

Stephen Galletto, Esq. (16:46):

Right. There also needs to be a level of training within your firm as to how to identify these instances. Right. How to identify these red flags. We typically recommend there be at least one training per year on how to identify instances or red flags where there may be a cause for elder abuse or determination of elder abuse.

Joseph Antonakakis, Esq. (17:05):

Yeah. I mean, what I usually do is when we offer our annual compliance meeting service, which we do for our fixed fee clients and our hourly clients as well, is I’ll include a slide specifically related to this type of stuff. And that serves as the annual reminder and the annual refresher of here’s the situation that you may run into.

Stephen Galletto, Esq. (17:26):

This is what it might look like.

Joseph Antonakakis, Esq. (17:27):

This is What it might Look like.

Stephen Galletto, Esq. (17:28):

These are your possible outs and/or ways to sort of determine whether or not it actually is a red flag issue or not.

Joseph Antonakakis, Esq. (17:36):

Yeah. Yeah. And due to the volume of these types of scams, and oftentimes the sophistication of these types of scams, we’re talking to folks about this. I would say I have conversations on a weekly basis, at least with people who are saying such and such client we think may have an issue with their family members trying to exploit them. Or this client thinks they have a girlfriend in a foreign country or this client – Like Greece. Like Greece.

Stephen Galletto, Esq. (18:09):

How much Bitcoin does that cost you? I don’t

Joseph Antonakakis, Esq. (18:11):

Want to talk

Stephen Galletto, Esq. (18:12):

About it. I’m kidding. That’s not real. That’s not real.

Joseph Antonakakis, Esq. (18:14):

The girlfriend or the Bitcoin? Both. I guess both.

Stephen Galletto, Esq. (18:18):

You know what? You said it.

Joseph Antonakakis, Esq. (18:22):

Yeah. So it’s important to remind folks on a regular basis of these types of obligations. And I’m glad that we made this an episode so we can inform not just our clients who we talk to about this on a regular basis, but those who might not be clients yet, who we can help analyze these types of situations as they come up. Because as much as I hate to say it, every advisor will run into a situation like this at some point.

Stephen Galletto, Esq. (18:48):

It’s inevitable.

Joseph Antonakakis, Esq. (18:49):

It’s inevitable.

Stephen Galletto, Esq. (18:50):

And

Joseph Antonakakis, Esq. (18:50):

If you don’t, it means you’re probably not

Stephen Galletto, Esq. (18:53):

Doing your job. Paying attention. Yeah, you’re probably not paying

Joseph Antonakakis, Esq. (18:55):

Attention. Exactly. So ensure that you can identify the red flags of financial exploitation, of diminished capacity, that you are maintaining a trusted contact form with the client. Here’s a question I get sometimes. Can I, the advisor, rely on the trusted contact form that the client filled out with the custodian?

Stephen Galletto, Esq. (19:18):

You’re not a party to that contract, right? So no. You can’t rely upon, say for example, the Schwab custodial agreement where the client names such and such person as their trusted contact. That’s not a trusted contact you are authorized to reach out to. It’s a trusted contact that Schwab is authorized to reach out to or whatever custodian is authorized to reach out to. So don’t make that mistake. If you were to reach out to a trusted contact for Schwab, but not you, and share information with that trusted contact based upon your issue, you’ve now breached your duty to your client. In an instance like this, which could get heated, right? Because again, your client, whether they want to believe it or not, probably are aware to an extent that their situation is a bit extraordinary or they’re being taken advantage of and they’re probably going to be ashamed if you shared this with somebody that you’re not authorized to share it with.

(20:11):

So have a process in place when you’re bringing a client on, whether it’s a specific age target that you want to rely upon, whether it’s just everybody.

Ronald Minsky, Esq. (20:21):

That’s important, Steve, because we think of this in terms of elder abuse and our senior clients. But diminished capacity can really happen at any age, which is why it’s important to talk about these trusted contacts really as part of your onboarding process. And also not just to do it as part of your onboarding, but to revisit it every year.

Stephen Galletto, Esq. (20:43):

That’s important.

Ronald Minsky, Esq. (20:43):

Because I’ve seen instances where the trusted contact became part of the exploitation. So we need to continue to take a look at this on an annual basis.

Stephen Galletto, Esq. (20:55):

Right. And again, people’s lives change. The son or daughter might be a perfectly capable, trusted contact when mom’s in her late 60s or early 70s, but life happens. Maybe son or daughter are not necessarily in the best possible mind space. Again, to Ron’s point, maybe son or daughter are the ones that are off to the side coaching mom to get money out of the accounts. They have money for whatever they want to do. I would encourage you to put the trusted contact in front of your client, at least annually as part of the annual meeting with your client while you’re reviewing the finances, while you’re reviewing the plan and the overall trajectory. Just put it in front of the client. Is this still a good person? Is this still someone that we can reach out to if we think there’s an issue?

Joseph Antonakakis, Esq. (21:36):

Can we talk for a moment about powers of attorney and how they play into this as well?

Stephen Galletto, Esq. (21:40):

No.

Joseph Antonakakis, Esq. (21:42):

Well, that’s all folks. Thanks for watching.

Stephen Galletto, Esq. (21:45):

Yes, let’s talk about powers of attorney. So what I view the trusted contact as, I would view that as a step towards a power of attorney. You can’t rely upon direction from a trusted contact, but potentially we’ll get to a point where before your client is at a point where they are incompetent, deemed incompetent, not incompetent in the sense that they don’t have the intelligence, but in the sense that they don’t have the capacity to name a power of attorney. Then you would have to go through maybe a guardian determination or something like that through the courts, which takes time. It’s a lot easier to think ahead, get a power of attorney on hand so that mom or dad or whoever, your client can just enjoy life. They don’t have to worry about things. They have a financial power of attorney in place that can be contacted directly by the advisor.

(22:36):

The advisor has the meeting with the power of attorney rather than mom or dad. It makes it a lot easier to transition.

Joseph Antonakakis, Esq. (22:43):

Like I said, I’m really glad we talked about this because it’s a hot topic. Something that regulators might ask about, trusted contact forms and things of that nature, and something that advisors should know about anytime they’re performing their annual meetings and working with their clients to keep this type of stuff top of mind. If anyone has any questions, specific issues that come up regarding elder abuse or financial exploitation, our team is here to help. Like we said, we deal with this type of thing at least on a weekly basis. Extremely regularly, unfortunately. But we are extremely well versed in what you need to do next if you run into an issue like this. So thanks so much for tuning in and we look forward to talking to you again on the next one.

Intro (23:29):

The Advisor Intelligence Podcast provides general information and commentary only. The content is not legal advice, nor does it create an attorney-client relationship. For more information about Stark and Stark services, please visit our website at stark-stark.com.