A registered representative (RR) discovers that a long-time client, who is elderly and recently widowed, has begun making erratic and uncharacteristic investment decisions, including expressing a desire to liquidate well-performing, long-term holdings to invest in highly speculative, illiquid ventures. The client's children have also contacted the RR expressing concerns about their parent's judgment. What is the RR's most appropriate initial action?
- AAdvise the client to seek legal counsel before making any further investment decisions.
- BAttempt to discuss the client's change in investment strategy and assess their mental capacity, while also considering contacting a trusted contact person or adult protective services if necessary.
- CInform the client's children that due to privacy regulations, the RR cannot discuss the client's account with them.
- DExecute the client's new investment instructions immediately, as the client is the ultimate decision-maker.
Show answer & explanationAnswer & explanation
Correct answer: B. Attempt to discuss the client's change in investment strategy and assess their mental capacity, while also considering contacting a trusted contact person or adult protective services if necessary.
FINRA Rule 2165 (Financial Exploitation of Specified Adults) allows firms to place temporary holds on disbursements and notify a trusted contact person when there is a reasonable belief of financial exploitation. Assessing mental capacity and contacting appropriate parties are crucial initial steps when diminished capacity is suspected.
Why the other options are wrong
- A. While seeking legal counsel might be a later step, the immediate concern is the client's erratic decisions and potential diminished capacity, requiring direct intervention by the RR.
- C. While privacy is important, FINRA rules provide exceptions for suspected financial exploitation or diminished capacity, allowing communication with a trusted contact.
- D. Executing erratic instructions without assessing capacity could be a breach of suitability and fiduciary duty, especially with an elderly, potentially vulnerable client.
Diminished Capacity Protocol
A procedure followed by financial professionals when they suspect a client, particularly an elderly or vulnerable adult, may have diminished capacity affecting their financial decision-making.
- Focus on protecting the client from financial harm.
- May involve temporary holds on transactions or disbursements.
- Often requires contacting a 'trusted contact person' or adult protective services.
- Requires careful documentation of observations and actions.
Memory trick: When the mind clouds over, protect the finances with care and contact.