New NASAA Report on Diminished Capacity Among Investment Adviser Representatives

August 08, 2020

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The North American Securities Administrators Association, Inc. (“NASAA”) recently released a white paper detailing the results of a study conducted by its Senior Issues/Diminished Capacity Committee. While many investment adviser firms are increasingly aware of issues related to diminished capacity in clients, NASAA has found that not all registered investment advisers are prepared to identify and address diminished capacity among investment adviser representatives. As part of the study, NASAA surveyed a number of financial institutions and industry professionals including Bryan Hill, President of RIA Compliance Consultants, Inc.

NASAA’s study noted that over a quarter of financial professionals (e.g., investment adviser representatives and/or registered representatives) are currently over the age of 55, while the number of Americans with age-related cognitive impairment is only expected to rise in coming years. Although diminished capacity is commonly associated with age, it can arise at any stage of life. In addition to age-related impairments, investment adviser firms and others interviewed for the study noted that diminished capacity in investment adviser representatives (“IARs” can arise on a temporary or permanent basis due to medical conditions, drug or alcohol abuse, and other life circumstances.

For registered investment advisers, diminished capacity among IARs creates real risk of harm to investment advisory clients (e.g., due to incorrect trades, unsuitable advice or susceptibility to fraud) and to the investment adviser firm (e.g., poor recordkeeping, inadequate supervision, failure to maintain standard of care, or regulatory actions). The study identified several best practices for investment adviser firms to consider.

Best Practices for Detecting & Mitigating IARs with Diminished Capacity

Use electronic surveillance and staff observations to identify at-risk investment adviser representatives or problematic situations. Are there other parties, such as assistants or family members, that could be hiding or covering for an investment adviser representative’s diminished capacity? Does the individual seem unusually forgetful, confused, disheveled, or aggressive?

Review client complaints for patterns of investment adviser representative behavior, particularly if out of the ordinary for the investment adviser representative. Be aware that some clients may simply change investment adviser representatives or investment adviser firms without passing along their concerns to the firm. Similarly, client complaints often arise only after the investment advisory client has suffered a loss and are a late red flag.

Require investment adviser representatives to complete continuing education. Although not currently required for IARs by state regulators, firms in the study noted that repeated failure of an individual to complete required continuing education was common among individuals with diminished capacity. By having an in-house requirement for investment adviser representatives, investment adviser firms can utilize this red flag.

Create a formal plan for dealing with an IAR’s diminished capacity when it arises. The plan should incorporate communication, education and training, and succession planning. Consider requiring all IARs, regardless of age, to create a succession plan.

Other Resources

RIA Compliance Consultants has prepared a checklist, Rep – Diminished Capacity of IAR (also referred to as Senior/Vulnerable Clients – Diminished Capacity of IAR), which assists in identifying some of the issues and best practices that an investment adviser firm should consider with respect to an investment adviser representative who may have diminished capacity or cognitive impairment.  This item can be purchased here.

If your investment adviser firm has a subscription to our annual compliance program (Value, Bronze, Silver, Gold or Platinum package), you can access a complimentary seat and listen to a recording of our recorded webinar, “How to Report Elder Abuse to Adult Protective Services,” via your online account with RCC.  Otherwise, an investment adviser can purchase this recorded webinar, “How to Report Elder Abuse to Adult Protective Services,” through our online store by clicking here; you can read about the lessons from a state securities regulator and adult protective services official about how an investment adviser firm can more effectively report elder abuse by clicking here.   Another resource for your investment adviser firm is our sample compliance manual section “Protecting Older and Vulnerable Clients with Diminished Capacity” which can be purchased by clicking here.

We Can Help

RIA Compliance Consultants encourages investment advisers to closely review NASAA’s report on diminished capacity among investment adviser representatives in light of their current compliance policies and procedures as well as the investment adviser’s actual practices.

If your investment adviser firm is an existing client of RIA Compliance Consultants and would like assistance in reviewing your policies and procedures or practices relating to diminished capacity, we encourage you to speak with your compliance consultant. Or, if you are not an existing client of RIA Compliance Consultants, click here to set up an introductory call with our Business Development Team.

Posted by Bryan Hill
Labels: Elder Abuse, Investment Adviser Rep Continuing Education, NASAA, Sample Forms, Seniors, Succession Planning, Written Policies and Procedures