There are many reasons why an individual might struggle to manage their finances. The most common are addictions, cognitive biases or decline, and dementia in old age. But younger people can be vulnerable too, particularly if they have mental health problems. Those in charge of the financial affairs of vulnerable people have a weighty responsibility.
That responsibility may take many forms. It may be that a person simply needs some day-to-day help in ensuring that bills are paid on time and in making adequate provision for the future. In this case, a trusted individual may be called to provide advice and assistance. Alternatively, they may be called upon to full responsibility for the person’s financial affairs – not only paying their bills, but managing their assets, looking after their investments, and even managing their inheritance.
Power of attorney
Ideally, it is better to make plans to manage a person’s vulnerability before they become vulnerable. Under these circumstances, one can ask them how they want their finances to be managed, what their investment goals are, how they want to handle inheritance and other wishes. This is usually done through a power of attorney or its equivalent, which stipulates that a specific individual is empowered to manage a person’s financial and legal affairs should they become incapable of doing so.
A power of attorney is made by the person it applies to and they must have mental capacity when they create it.
A power of attorney is made by the person it applies to and they must have mental capacity when they create it. The person’s lawyer can verify their mental capacity, only involving a doctor if there is a need for further assessment. However, a doctor may need to be involved to activate a power of attorney, if confirmation is needed to certify that a person does not have the mental capacity to manage their own affairs.
However, this type of forward-planning isn’t always possible. If a person loses mental capacity very quickly, it may be necessary to apply to the courts to certify that they need legal protection. The court may then appoint a trusted person to manage the individual’s affairs. The person may retain the right to carry out financial transactions, but they can be prevented from doing so if their decisions are considered inappropriate or reckless.
Duty of care
The designated individual has the responsibility to ensure that a vulnerable person’s finances are managed properly; which means managing them at least as well as they would run your own affairs. It is not permitted to speculate on their behalf, direct money into ‘get rich quick’ schemes or undertake risky investments, even if there is reason to believe they might deliver good returns. At all times, the empowered individual must apply appropriate due diligence and exercise caution. The judge dealing with the case can demand that any accounts are submitted for inspection.
It is useful to build as broad a picture as possible of the person’s wishes, although in some cases it may be necessary to draw information from the documents they have signed in the past, such as their will, a statement of wishes from their pension scheme, or any separate statement of intent. The more information that can be gathered, the better.
This can ensure that the person’s money is managed according to their wishes. If they want to leave an inheritance, their assets should be managed in such a way as to make that possible. If they had planned to give money away to reduce inheritance tax, this should also be explored. It is important to keep the vulnerable person involved wherever possible to be sure that their wishes haven’t changed.
Risk of abuse
Vulnerable adults are, unfortunately, often liable to exploitation. They may be more suggestible and can be persuaded by sales people offering apparently innovative ways to make higher returns from their money.
A recent case in the UK saw a widow cold-called and persuaded to pay around £5,000 for a diamond as part of an investment scheme. The company, which had an official-looking website and glossy brochures, promised high returns. Over three years, it exploited her lack of financial experience, persuading her to hand over her life savings of around £400,000. Her family were able to recover only around 10% of the money.
The individual managing the vulnerable person’s affairs needs to be their eyes and ears, being alert to any suspicious transactions or disposal of family assets.
The individual managing the vulnerable person’s affairs needs to be their eyes and ears, being alert to any suspicious transactions or disposal of family assets. The person may be reluctant to admit that they have done something foolish, but problems can be better resolved if they are addressed early.
The right tools
Leading financial services companies increasingly recognise financial vulnerability as a problem. Many banking groups now have procedures in place to help support people who struggle to manage their own finances, and there are now apps that can help. These will alert users and their designated friends or family members to signs of financial vulnerability to help prevent fraud, such as unnatural spending patterns or the transfer of large amounts of money.
There are also organisations that can help, including charities that run a trusted appointeeship service to protect vulnerable adults if there aren’t any family members available or none with sufficient knowledge.
An adviser can help protect the individual entrusted with responsibilities for someone else’s affairs, particularly if their knowledge of finances is limited. They can assist in selecting appropriate investments as well as gaining understanding of the responsibilities involved, helping ensure that the duties are carried out successfully.