Recent Developments: Meeting the needs of Older Investors Independent Financial Brokers

1. Recent Developments: Meeting the needs of Older Investors Independent Financial Brokers Spring Summit - April 24, 2019 Arthur Fish

2. Purpose What is Vulnerability and How to Spot and Address it. Address regulatory expectations for dealing with Vulnerable Clients and Trusted Contacts Answer your questions

3. Agenda Vulnerability: Generally and for Seniors Trusted Contacts Fraud and Abuse Escalation Common Legal Risks (Civil and Regulatory) Tips for Protecting your Practice

4. Why Now? Why Anticipate? Dual Licence = adopt the securities standard for everything IIROC, IFIC, MFDA, OSC all have guidance or policies Rapid increase in complaints; Slow, steady increase in litigation We’re all on our own Increase in incidence of mental illness (anxiety, depression) What’s good for your regulator is also good for your business

5. Best Practices: the Basics • Effective Client Communication (annual face-to-face: active listening; broad-focused KYC) • Effective Internal Communication (good notes and records; red flagging; co-ordinated escalation) • Trusted Contact including consent to Release Confidential Information (PIPEDA) (copy of P of A?) • Procedures for addressing vulnerability including: • Policy on refusing instructions • Policy on freezing accounts

6. Why Focus on Vulnerability?

7. Financial Services Dilemma • Vulnerability to incapacity, bad decisions, fraud & abuse increases with age (for Advisors too!) • Fraudsters are focusing on older people & using technology inventively to extend their reach • Financial Services Industry is on the front line of the transfer of wealth from Boomer Parents to Boomers • Conflicting legal obligations • Law of Mental Capacity focuses on protecting autonomy and privacy • Securities Regulators focus on enhancing individual security

8. General • High rates of psychiatric\psychological disorder • Depression • Anxiety • Alcohol and Drug Addiction • High rates of family breakdown • Unprecedented divorce rates from 1968 on • Increased divorce rates among 70+ • Changes in family structure • Longer lives • Stagnating middle class incomes • Greater geographical movement: Urbanization • Blended families: second spouses • Probably increasing levels of dependency • Fund raisers report wealthy older people must give to children and grandchildren instead of charity • “Long runway” millennials' + high cost of urban living

9. An Aging Population • Wealth clustered with aging Canadians • Average Ontario 65 year old will live to age 85.3 (<male >female) • Canada has two aging populations • Boomers’ Parents • Boomers • Wealthiest Generation in human history… • Followed by the Sandwich Generation • More people >65 than <15 • Serve this population or close up

10. PRACTICAL TAKEAWAYS

11. Assisting Older Clients Time of day State of Health Light Noise Pace Repeat Pocket Talker

12. Active Listening • Patience: people say what they mean – eventually… • Invite disclosure • How are you? • What are you doing these days? • How are your children? • How can I help you? • Listen carefully, follow up • How is your daughter now? • Beware the last minute disclosure • Did I mention that my son’s in rehab

13. The Regulatory Expectation “A suitability analysis must be performed whenever there is a material change in the client’s life circumstances and objectives” • Common trigger events for Older Investors: • “Retirement” – changing meaning • Death/incapacity of a spouse; • Medical condition\needs increasing burn rate • Sale of principal residence; • Purchase of retirement property; • Estate planning considerations;

14. Regulatory Presumptions: • As clients age, factors used to determine suitability will be applied more rigorously: • Time horizon: a realistic assessment as to when the client will require access to funds and how much; • Risk Tolerance: more limited ability to replenish capital loss; • Objectives: presumptions against pure growth objective; • Expectation of generating market returns without market risk” • Dilemma: many older investors NEED to remain exposed to capital markets

15. Documenting • Fundamental • Major issue in dealing with complaints & claims • Presumption against the advisor • Consider electronic note-taking • Speak your note aloud as a summary or conclusion • Issues we discussed include… • Templates or checklists? • No note = It didn’t happen

16. Vulnerability: Generally and for Seniors

17. You’re not a Social Worker: Realistic Goals • “Know Your Client” well enough that you can spot and react in a timely way to vulnerability related departures from the client’s own normal conduct that threaten the client’s well being (especially unprecedented transfers or gifts to third parties), • Know your business well enough that you can spot and react in a timely way to instructions to implement unsuitable or potentially unsuitable trades. • Recognize that old age carries with it an increased risk of vulnerability, and – • Understand common sources of vulnerability, especially loss of mental capacity, • Recognize common patterns of fraud and abuse, • Assist clients to plan for vulnerability and incapacity by designating a Trusted Contact • Understand and follow the Gluskin Sheff policy on Vulnerable Investors • RESPOND appropriately when faced with conduct that raises a REASONABLE concern the Client may be INCAPABLE. • You SPOT the problem: you usually need an EXPERT to resolve it.

18. Vulnerability Generally A person who because of circumstance, illness, disability or injury (i) lacks mental capacity, (ii) is less able to make good decisions, OR (iii) is less able to recognize or resist third party pressure to make poor decisions. Unexpected death of a spouse Marital\Relationship Breakdown (beware the Silver Separation) Heart Attack or Stroke Chronic Psychiatric Illness (anxiety or depression) Head Injury Fraudsters (experts in exploiting vulnerability) Hacking and Cyber-crime

19. Vulnerability and Old Age Old Age carries with it an increased risk of vulnerability. • Increased “burn rate” with aging and especially at the end of life • Shorter investment time horizons • Decline in attention and memory may lead to fixed overestimation of ability • Delirium: short term loss of mental capacity often associated with medical illness, untreated medical illness, anesthesia or hospitalization • Dementia: progressive and irresoluble loss of mental capacity arising from a disease process, for example, Vascular or Alzheimer’s-type dementia • All of the above factors also increase vulnerability to abuse and fraud • Loneliness • Dependence • Increased cognitive decline = Increased vulnerability to undue influence, fraud and abuse

20. Who’s a Senior • Rule of Thumb is people age 65 or older (for securities 60 is safer) • For KYC & Suitability Purposes take a more functional approach: • Asset accumulation phase of life • Asset expenditure phase of life • Anticipated life span and need for capital accumulation • Conflict with regulatory approach • Many older people NEED exposure to markets or they’ll run out of money • People are working longer and living longer • Ceasing work; death of spouse; loss of mental capacity are ALWAYS material events for KYC and suitability purposes.

21. BAD JUDGMENT • Overrating ability based on declining ability to recognize novelty (Us Too!) • Often arises with people who have a long history of success as investors or in business • Most common form: “I’m a good driver.” • Know Your Client + regular contact + minimum of one annual “face-to-face” • These are the customers most likely to resist face-to-face: they “don’t need it.” • Communicate your concerns clearly, respectfully, and patiently • Consider terminating if all else fails

22. What is Mental Incapacity? Inability to UNDERSTAND relevant information OR to APPRECIATE reasonably foreseeable consequences of making a decision Presumption of Capacity (everything’s normal as long as it seems normal) KNOW your client: incapacity often manifests as a marked, unexplained departure from the CLIENT’s norm Conduct that would cause a REASONABLE person CONCERN that something MIGHT be wrong

23. Responding to Mental Incapacity COMMUNICATE your concern to the client If that fails, communicate to a TRUSTED CONTACT If that fails assess SERIOUSNESS and ESCALATE

24. TRUSTED CONTACT

25. TRUSTED CONTACT • Client designates IN WRITING a person(s) and consents to disclosure of personal or financial information to assist you in resolving concerns that the client may lack capacity or be subject to undue influence, fraud or abuse. • Trusted contact should be: • Over 18, • Know the client well enough to be able to provide meaningful assistance. • NOT you or any of your colleagues. • May be the attorney for property, but it is usually preferable if not. • Trusted Contact Person IS NOT a decision maker. He or she is there to help clarify and resolve issues. • An Attorney pursuant to a “Continuing Power of Attorney for Property” is a decision maker if the client is incapable or wants to stop making decisions.

26. WHY? • Solves three problems: • Eliminates breaches of privacy legislation. • Gives a clear path forward – identified by the client - when problems arise. • Frees you from playing social worker – identify the problem and enlist assistance. • Behave like a CEO: make it someone else’s problem • NOT a panacea • BUT my guess is it will eliminate 80% of otherwise high risk\high stress issues driven by client vulnerability • Use it for ALL clients

27. ISSUES WITH TRUSTED CONTACT • Not mandatory. If client refuses, document offer and refusal. • A capable client can terminate or change a TCP. • Trusted contact might contact you. This can be helpful, BUT the customer is the customer. You still need to talk with him or her, and should not promise to keep secrets. • If someone alleges incapacity, onus is on them to take steps to prove it. • Solves three problems: • Eliminates breaches of privacy. • Gives a clear path forward – identified by the client - when problems arise. • Frees you from playing social worker – identify the problem and enlist assistance. • Never contact the TCP to resolve his or her own suspected undue influence, abuse, fraud. • Useful in addressing inability to find client; suspected incapacity; suspected undue influence, fraud or abuse.

28. Fraud and Abuse

29. FRAUD & THEFT Deceit, deception or other illegal means imposing a loss or risk of loss on another person. Theft is taking. Can disclose to the police even without consent. Fraudsters targeting older people: CRA fraud; Computer fixers; Home Repairs; the “Granny” Fraud Angry families turn to deep pocket (bank, advisor) for recompense. Ask why before following unusual instruction to transfer funds to third party. Escalate if client refuses to talk OR appears to be subject to pressure.

30. Abuse is Trickier • Red flags • Interference in communication (interception) • Isolation • Interference in meetings • Issue instructions (“MOM wants…”) • Background whispering • Uncharacteristic transfers to third parties or other departures from long standing norms • As with Incapacity – client, third party, escalate – • “Urgent Investigation” Public Agency – incapacity + risk • Risk to personal safety or evidence of crime = police

31. Escalation

32. ESCALATION • The When: • The spectrum of scenarios; • The judgment calls including when to stop; • The How; • The client; • Internally; • Externally

33. Regulatory Presumptions: As clients age, factors used to determine suitability such attract greater scrutiny: * Time horizon: a realistic assessment as to when the client will require access to funds and how much; * Risk Tolerance: more limited ability to replenish capital loss; * Objectives: presumptions against purely capital gain objectives; * Market returns without market risk” -

34. Questions?

35. Contact Information: Arthur Fish – afish@blg.com; 416-367-6178