Cooper Grace Ward's Hayley Mitchell and Michael Perkins from Autonomy First

Most advisers lack the necessary training to be able to spot cognitive decline according to lawyer Michael Perkins, who believes the associated risk of consumer harm is a “ticking legal time bomb” for AFSL holders and representatives.

Perkins says “transactional” advisers are providing statements of advice to clients who do not have the ability to make fully informed decisions. It’s a problem that’s increasing with the ageing population and one that poses a significant legal threat to the advice profession, he tells Professional Planner.

“Research tells us now only about 60 per cent of the adult population is not affected by some form of mild cognitive impairment,” Perkins says. “Advisers are simply generating a statement of advice and telling the client to read it and make an unconstrained decision.”

Perkins, who specialises in estate planning law at the Autonomy First Lawyers, says that without evidence of fully informed consent, signed SOAs are a “business failure”.

He doesn’t want to sound “jaundiced” in his view of the advice industry, Perkins says. “There is an economic, social and commercial necessity for financial planning,” he notes.

The problem, he insists, is that a lack of robust training and education means “60 to 80 per cent” of advisers lack the ability to recognise declining cognitive ability. “What advice needs is better processes, better training.”

Aged Care Steps director Assyat David says for most advisers FASEA’s education mandate has taken precedence over the last 18 months. “That’s fair enough,” she says, “but a lot of specialist areas like aged care are being neglected.”

Sydney financial adviser Wayne Lear notes that younger, inexperienced advisers are often less able to spot the signs of decreased capacity. This dynamic is exacerbated by the industry skewing younger as older advisers retreat due to business pressures and the tougher educational benchmark.

“A lot of these advisers haven’t had those long-term 20 to 30 year clients,” Lear says.

Lear points out that advisers of SMSF corporate trustees need to keep both the SIS Act and FASEA’s Standard 4 – which requires “free, prior and informed consent” – in mind.

“When you have a client who is a director of an SMSF corporate trustee and they’re incapable of making a rational, reasoned decision that is fully informed because there is even a little bit of cognitive impairment it means it’s impossible to get their prior informed consent,” he says.

Work being done

While acknowledging the need for advisers to be better equipped in the area, David notes capacity issues are nuanced and advisers can’t always be expected to pick up on triggers when they immediately present themselves.

“We need to be careful not to expect advisers to do too much in the sense that they aren’t medical experts, they’re advice experts,” she says. “I don’t think that seeing a client once or twice a year is always enough to identify capacity issues.”

To that end, Deakin University professor of practice Adam Steen says he has teamed up with the Society of Trusts and Estate Practitioners (STEP) and a team of 80 researchers worldwide to dissect the issue of capacity recognition. “There needs to be a process and procedure developed that advisers can use to screen for obvious things,” he says.

The issue goes further than financial advice, Steen explains.

“If you have compromised legal capacity it brings in a whole range of contracts,” he says. “Insurance, advice… all the equity release stuff like reverse mortgages would be questionable because they only give them out to people who are over 65, more than half of which would have cognitive decline.”

Powers of Attorney and supported decision-making play a role in the solution, he says, but work also needs to be done on the prevalence of elderly abuse through these channels.

Shades of Grey

While acknowledging the “serious issue” of capacity in the context of advice, Cooper Grace Ward wills and estate lawyer Hayley Mitchell sees limited legal danger when it comes to picking up on very early-stage cognitive decline.

“Certainly if the adviser is able to pick up on something pointing towards a capacity issue they do have an obligation,” Mitchell says. “But if it’s not obvious it would be hard to find that the adviser would be at fault.”

“Advisers certainly need to be alert to capacity issues, but it would really depend on the situation,” Mitchell continues.

“If the adviser has concern about the client being manipulated or influenced by other family members that’s where you might get legal advice. If it’s more so just the legal aspect of assisting the client navigate the next steps in adjusting to how their financial affairs are managed legal advice may not be necessary.”

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