Diminished Capacity and Elder Financial Exploitation

5 min read
January 02, 2020

Either as a new RIA or as an experienced firm, you have likely heard a horror story about an elderly client, diminished capacity, and financial exploitation. Unfortunately, these stories are reality and the instances are increasing rapidly.

In fact, elder financial exploitation is the fastest growing category of elder abuse in the country and includes the illegal or improper use of an older adult’s funds, property, or assets. Due to investment advisors’ unique position in relation to their client’s finances, advisors can play a key role in identifying diminished capacity, financial exploitation, and ultimately, help prevent harm to their clients.

It’s important to note that while diminished capacity is often associated with elderly clients, any client can experience it at any time due to illness or disability. Diminished capacity can manifest as:

  • Inability to process simple concepts or decline in ability to do simple math problems, difficulty in understanding important aspects of their investment account, difficulty managing their checkbook, or confusion and loss of general knowledge that the client once understood or had.
  • Erratic behavior by the client, including: memory loss, difficulty speaking or communicating inability to appreciate or understand the consequences of decision; disorientation; or an uncharacteristically unkempt appearance.
  • Impaired judgement regarding investments or money, including: making decisions that are inconsistent with client’s current goals or commitments; or failure to fulfill financial obligations.
  • Uncharacteristic, sudden, or unexplained changes to client’s financial plan and health, including: cash withdrawals or wire transfers; appearing with new and unknown associates; nervousness or anxiety; lack of knowledge regarding their financial status; and sudden changes to financial documents such as powers of attorney or account beneficiaries.

When a client experiences diminished capacity, they are at a greater risk of becoming a victim of financial exploitation. That’s why it is important for your firm to have a policy in place when confronted with a client you suspect is experiencing diminished capacity.

Additionally, as the rates of elder financial exploitation continue to rise, state legislatures and securities divisions are reacting by implementing mandatory reporting laws and rules that require individuals to report suspected or actual financial exploitation to the appropriate state department (often the State’s Department of Health and Human Services). Some states have directly named investment advisors and financial planners as mandatory reporters, while other states have created a blanket rule that require everyone, regardless of profession, to report financial exploitation. Many of these states have even made it a crime to fail to report if you are a mandatory reporter (most often this failure to report can result in a criminal misdemeanor charge which can look like up to one year in jail and/or a monetary fine). As a result, it is increasingly important to ensure that your firm has a compliance policy in place to address elder financial exploitation.

The XYPN Compliance Team has also noted increased requests from state regulators for elder financial exploitation and diminished capacity policies during the initial registration process. To assist members in addressing this issue, XYPN’s Compliance Team has created a sample Diminished Capacity and Financial Exploitation policy that Firms can now use and tailor within their compliance program. The policy closely follows the NASAA recommendations on reporting suspected exploitation of vulnerable adults, and as a result, creates a policy that the firm must report financial exploitation when the firm’s employees and/or CCO have a reasonable cause to believe that a client is a victim of financial exploitation. The policy also requires that RIAs will have all of their clients, regardless of age, sign a trusted point of contact form.

Advisors need not worry about their confidentiality and privacy requirements, as federal law protects them when reporting a reasonable belief of financial exploitation. Specifically, the Senior Safe Act protects advisors from civil liability when reporting a reasonable belief that an adult is a victim of financial exploitation. This means that when an advisor has a reasonable belief that an adult is a victim of financial exploitation, that investment advisor may report that belief to the appropriate government authority without fearing that they are breaking confidentiality and privacy laws. In fact, it is arguably best practice to report any suspected financial exploitation in order to ensure that you are upholding your fiduciary duty.

However, one important hook about the Senior Safe Act to remember is that in order to receive this protection, Advisors must provide training to employees on recognizing and addressing senior financial exploitation. The XYPN draft policy nods to this requirement by stating that employees will receive in-house training on diminished capacity and elder financial exploitation.

Finding clear information on your legal responsibilities in regard to reporting financial exploitation can be tough—especially since these laws can be found in several places: a state’s vulnerable adult statute, the state’s securities regulations, or even within the state’s administrative code. As such, it is highly advisable that you take some time to explore your state securities’ website, or even contact your regulators directly, to determine your precise legal duty when it comes to reporting financial exploitation. Nonetheless, to impress the importance of investigating your mandatory reporting duties, the following table lists the states in which investment advisors and financial planners are legally required to report suspected or actual financial exploitation to the proper authorities:

Please note that state regulations and laws may change quickly. This list is meant as an example and may not be completely accurate. It is advisable that you check the laws and regulations of your state to determine the reporting requirements that are applicable to your firm.

States in Which Investment Advisors Are Mandatory Reporters

States in Which Investment Advisors Are Not Mandatory Reporters








District of Columbia

















New Hampshire


New Mexico


North Carolina


North Dakota





New Jersey


New York

Rhode Island


South Carolina

South Dakota








West Virginia



It is worth noting that most of the states that do not require mandatory reporting still allow Advisors to report suspected financial exploitation when that belief is reasonable. So even if you find yourself in a state where reporting is not required, it is still advisable that you have a policy in place in order to ensure that you are upholding your fiduciary duty and acting in the best interests of your clients.

Jocelyn Tillisch

About the Author

As a Compliance Specialist at XYPN and a licensed attorney on the side, Jocelyn is a big fan of regulatory research and figuring out the rules. Prior to joining XYPN, Jocelyn worked in Disability and Civil Rights law in Seattle, Washington. While the financial services industry was a bit of a career change for her, she uses her legal acumen to help XYPN members be the best advisors they possibly can be.

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