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Tuesday, May 5, 2015

Assessing Client Cognitive Function: Legal Pitfalls

Should an insurance agent, attorney, accountant, financial planner, or investment manager, be responsible for determining the cognitive ability of an older client when selling investment products? This article explores the legal implications.

Should an insurance agent, attorney, accountant, financial planner, or investment manager working with a client be held responsible to determine the cognitive ability of an older client? If seemingly beyond the scope of current law, regulation, or standard of care, consider the plight of California insurance agent, Glenn Neasham.

On December 14, 2010, Neasham was taken from his home in handcuffs and indicted under California’s Elder Abuse law on three counts of felony theft. Ultimately bankrupted by the ordeal, he was convicted ten months later of one count of felony theft and sentenced to three hundred days in jail. As a result of the conviction, his insurance license was permanently revoked, leaving him with no means of support or dignity.

His "crime?" Neasham sold an indexed annuity to Fran Shuber, the eighty-three-year old girlfriend of a client (the annuity was approved for sale in California to people up to age eighty-five). The bank from which funds were withdrawn to pay for the annuity reported the boyfriend for suspected financial elder abuse under California’s Elder Abuse Statute. He, rather than the insured’s son, was the named beneficiary. But the focus for abuse shifted to the insurance agent when it became apparent that Ms. Shuber may have suffered from Alzheimer’s disease. Intriguingly, the California Department of Insurance ultimately provided financial assistance to the local prosecutor who initiated The People of the State of California vs. Glenn Allen Neasham.

The nature and degree of the crime was triggered by the fact that the contingent surrender charge of the annuity—the "theft"—was greater than $950, which is the threshold for felony under California’s Elder Abuse law. The jury interpreted theft as the mere "taking" of something without looking to see if there was value received in its place—an issue that became the primary focus in the subsequent appeal before the California Court of Appeals.

It should be noted that at no time did a party of interest make a complaint about the sale of the annuity. The entire process was pursued by the Department of Insurance (DOI) and the local prosecuting attorney under the theory of elder abuse.

Not only did the prosecutor, by her own subsequent admission, fail to present evidence that Neasham knew or should have known his client might have been mentally impaired and could not make a decision regarding acquiring the annuity, but she also failed to acknowledge the much simpler remedy in such a circumstance: to request from the insurance company a rescission of the policy with full refund of premiums paid, plus interest under the well-understood principle of void ab initio— void from the start because incompetent individuals by law cannot enter into a contract. 

Ironically, Ms. Shuber’s estranged son obtained conservatorship of his mother at roughly the same time as the 2011 trial, and one of the first things he did was to surrender the annuity. The insurance company treated it as void ab initio and refunded the premium plus interest.

In the process of pursuing an appeal with a court-appointed attorney who had no experience in such matters, the case came to the attention of the 12,000-member Society of Financial Services Professionals. The Society retained local legal counsel to file an Amicus Curiae (friend of the court) brief to inform the Appellate Court of the insurance issues underlying the case, and to advise the court that there was no existing statute or standard of care suggesting that an insurance agent had the obligation to determine the cognitive ability of his client.

The Society was also instrumental in finding a national recognized law firm specializing in such appeals to take over the case. On October 8, 2013, the bizarre case of California vs. Neasham came to a close with a unanimous reversal of the felony conviction. While the state’s Attorney General vigorously appealed the reversal to the California Supreme Court, the State’s appeal was denied in January 2014. However, the Appellate Court’s reversal was “decertified,” meaning that while the reversal was valid, it could not be cited as precedent in future cases.

The effect of the reversal by the Appellate Court is that Neasham’s conviction of felony was nullified (as if it had never occurred), and while the prosecutor in the original jurisdiction had the theoretical opportunity to retry the case, the option was formally declined shortly after the California Supreme Court’s refusal to hear the case. The criminal case against Neasham has officially ended, but his life and family have been forever shattered.

To the best of our knowledge, this was the first case of its kind and scope in California, but it was not the last. Just months following the close of Neasham’s six-year ordeal, The People of California vs. Alan S. Lewis was filed in Riverside County. Alan Lewis had been a licensed life and annuity agent in California and had sold annuities to senior citizens, generally meeting with the clients in their homes. The criminal lawsuit included twenty-nine counts of felony burglary. The crime was similar to Neasham’s in that the charge of theft was based on the annuity’s contingent surrender charges and the extent to which those surrender charges were greater than $950. Unable to meet the $600,000 bail set in his case, Lewis was incarcerated in county jail for almost four months until all the charges were suddenly dismissed on July 10, 2014, without any explanation from the prosecutor’s office or the court. Lewis has retained counsel and is suing the county, allegedly for millions.

Meanwhile in Iowa, there was the case of St. Malachy Roman Catholic Congregations of Geneseo v. Ingram, a situation of a different nature but with an equally chilling implication for advisors. The defendant was a financial advisor to the decedent, but was sued by the beneficiaries of the decedent’s signed written estate plan. The beneficiaries alleged that the financial advisor was negligent in the performance of his duties, and therefore, the beneficiaries did not receive what they were supposed to receive under the plan.

Generally, the Doctrine of Privity is an agency relationship that only exists between the direct parties involved. A non-client or “derivative client” status usually only arises in the context of legal ethics and legal malpractice, and Ingram was not an attorney. While the trial court granted summary judgment in favor of the advisor and against the plaintiffs—concluding that Ingram, a non-attorney, owed no duty to the beneficiaries—the Iowa Supreme Court reversed the judgment entered against plaintiffs, holding that the case raised a genuine issue of material fact as to whether Ingram’s negligent performance of his agency responsibilities caused the beneficiaries not to receive a specific devise set forth in the decedent’s will. While that argument will likely be raised again in future cases, in this instance the U.S. Supreme Court ultimately denied the appeal of St. Malachy and the other charity plaintiffs because their claims were too speculative for recovery. A relief, we assume, for Ingram but not for the legal bar. 

Before we discuss the big picture implications for insurance agents and financial advisors—and indeed anyone selling investments or rendering advice or providing legal services—there are some quick and disturbing observations:

1. Alleged bad acts by agents such as misstatements, false advertising, or making adverse comments about other agents or insurance companies had previously been taken up in administrative proceedings by the DOI when pursued by a customer complaint. Today, however, the strategy appears to have shifted to that of criminalizing that which
had in the past been civil (although not necessarily polite!) in nature; 

2. With respect to the sale of annuities and life insurance, California has for a number of years accumulated budgetary reserves dedicated to making “grants” to local prosecutors to pursue agents who may or may not have violated the elder abuse laws; 

3. Will such reserves be featured in your state to fund investigations and prosecution? 

Is This the Wave of the Future? 

The cases discussed earlier indicate a possible trend by state prosecutors and insurance investigators to initiate criminal indictments and penalties and fines against financial advisors and other professionals who sell various kinds of services and products to older Americans alleged to have mental dysfunction or diminished capacity. 

This further suggests the possibility of new civil Causes of Action by new adversaries. The St. Malachy case is a precedent decision that gives notice to producers and advisors of expanded ways in which civil actions may be taken against them by those who were never their clients. Participants should not be surprised by the news of civil suits touting legal theories they never heard of. 

While cases dealing with misconduct related to the elderly are typically classed as either criminal or civil, new cases may be asserted as both. Criminal conduct typically encompasses robbery, domestic abuse and/or neglect, financial exploitation of elder adults, and obtaining property by false pretenses. 

Civil Conduct—that which is tortuous—includes abuse, neglect or exploitation, breach of fiduciary duty, fraud, constructive fraud, conversion, and undue influence.

Under both criminal and civil conduct investigations, it can be anticipated that inquiry will be made about the loss of mental ability that would impede choices and raise greater vulnerability. Such indistinct evidence as forgetfulness, confusion, delusion, mental dysfunction, diminished capacity, and early incidents of Alzheimer’s disease will be “People’s Exhibit #1.” 

Legal and Ethical Issues Underlying These Cases 

Should an insurance agent, attorney, accountant, financial planner, or investment manager working with a client be responsible to determine the cognitive ability of an older client? Consider the following: 

1. If the Neasham case and its progeny—or intervening or subsequent regulation or legislation—were to assign to a professional the responsibility for determining a client’s cognitive ability, what training and tools should (financial) professionals use for that purpose?

2. Will a safe harbor be provided for the professional who applies such tools?

3. The traditional definition of senior is age sixty-five, but California’s Elder Abuse statute provides significant sanctions for those found to be physically or financially “abusing” individuals as young as age sixty.

4. Further, common law in most jurisdictions will sanction financial abuse of other categories of disadvantaged citizens including those with physical or mental disabilities, some of which may not be apparent to the untrained eye.

The criminal charge on which Neasham was convicted was felony theft. The theft was defined as the inability for eighty-three-year-old Fran Schuber to immediately access 100 percent of the premium paid to acquire the annuity. Thus, both directly and indirectly, this case used the surrender charge of an annuity—almost universally applicable in such products—as the basis for the conviction of felony theft. 

The court and jury were unaware of the reason why many insurance products have a fee assessed against a policy’s cash value in the event of premature surrender or withdrawal. The jury equated the surrender charge directly with the commission received by the agent. 

The elephant in the room is that there are no clear standards of suitability to suggest what types of product should or shouldn’t be sold to older adults. California’s Department of Insurance approved the MasterDex-10 annuity for sale to consumers through age eighty-five, and while the criminal charges ironically did not address whether “the State” believed the product to be unsuitable, clearly this conclusion is inherent in the decision to prosecute for felony theft. 

Even though the Appellate Court reversed Neasham’s conviction, we are advised that other state DOIs and/or Attorney General offices have begun their own examination of cases to evaluate for elder abuse and failure to detect cognitive impairment. One logical conclusion is that agents and advisors will avoid working with seniors, in turn resulting in reduced annuity sales. This could hurt agents, carriers, and the clients who can benefit from deferred as well as immediate annuities as part of their overall retirement income and estate planning strategies.

Statistical Expectations of Life, Health, and Cognition

Seventy-eight million of “us” may ultimately be headed for our respective assisted living facilities. As a result, all client-facing professionals need to better understand the underlying issues of aging and dying. By the time we get into our sixties, our use of certain words or names that used to be so spontaneous has reverted to the tip of our tongues or the back of our brains, or seemingly, somewhere in the garage! We misplace our car keys more often. But when we eventually find them, we just drive away and perhaps grumble about the frustration and lost time trying to find them. On the other hand, if you find your car keys but don’t know what they’re for…well, that’s cognitive impairment. 

Cognitive ability is somewhat age-based, but we’ll all experience it a little differently and at different points in our later lives. To begin to understand this last third of our lives, it is valuable to start by understanding the basis of the statistical meaning of life expectancy, which depends on the scientific certainty of the number of deaths each year in an extremely large, homogenous group (as to gender, age, and health). Average life expectancy is the point at which 50 percent of any homogenous group has died and 50 percent are still alive (see Chart 1). 

There now exists a technology to provide a more personalized expectation, at least with respect to the subset of our age and gender peers who all have developed the same health issues. Doing a personalized life expectancy assessment on a seventy-five-year old couple can provide very useful information when it comes to deciding:

• how best to continue to fund a universal life insurance policy,
• how much income to safely take out of retirement resources,
• how best to work with them if there are elements of cognitive impairment.

Personalized life expectancy assessments are statistical and not individually predictive, but give a more granular and objective basis on which to make and manage financial decisions.

In the last few years, that same “personalized” approach has been extended to a statistical view of how much of our remaining years we can look forward to in good health, and the gradual process to physical impairment and dependence, leading to the need for skilled nursing. Such assessments can suggest (again from a statistical rather than individually predictive perspective) what we might be able to look forward to in the number of active “healthy” assisted living years, and skilled nursing years as a distribution of time and level of impairment over the remaining lifetime of the individual or couple. We predict that this type of data will be more and more in common use in our planning processes with our clients in the very near future (see Chart 2).

Similar attempts at helping us see the discrete segments of the last one-third of our lives through life and health expectancy data are also beginning to emerge with respect to cognitive expectancy, and this can help us do a better job with our older clients and their families as we find ways to help them through the progression of the stages of older life (see Chart 3).

Issues for Which Professionals Must Be Particularly Wary

1. It can sometimes be easy to gain the trust of certain older persons in order to get them to believe that they should change their investment portfolio or insurance or annuity products. This is often accomplished just by offering friendship and helpfulness to someone who is alone or lonely and appears vulnerable. It is not unusual for such individuals to get judicial sanction to become a “guardian of the property” and have free access to plunder their client’s assets. 

2. It is difficult to judge the passage of time, even if we have had fairly consistent contact with an older client. Over a period of years, the client may be declining and we’re either not paying attention, or we acknowledge it but unconsciously use it against them. Or we acknowledge it but we don’t want to do anything about it because it may jeopardize our position in one way or another. Missing how the passage of time catches up with aging clients increases the chance of making wrong choices about declining clients. 

3. It is not unusual to find a circumstance in which the professional has the ear of one child or another who brings the parent(s) to meet with the advisor. There is no acknowledgement that the client has diminished capacity, and it’s a wink and a nod about that incapacity. 

4. In blended families, children of a stepparent may bring in the parent, knowing of diminished capacity, yet manipulate the situation so the parent-in-law doesn’t inherit.

5. A caregiving adult child brings the parent to the professional, explaining that the other siblings aren’t really involved. The caregiving child gets the advisor to do those things that benefit the childwhile the incapacitated parent can’t really do anything about it. 

6. Some older individuals or couples may be lured by a nice meal in a nice restaurant—all the while presuming the competence/ability of the presenter. Such “advisors” are not at all concerned about the person’s diminished capacity. In fact, it facilitates their objectives. 

7. An unwitting or uninformed advisor may create the biggest problems. Older adults, even with diminished capacity, know when they’re not given acknowledgment. Their self-esteem and pride get injured. This derives from feeling their interests aren’t being given attention. This is not as crisp and sharp and obvious as some of these other issues, but it is what happens to us as we get older. 


There are some specific ways in which we can change our dialogue and client process with older clients in order that inadvertent elder abuse happens less frequently. Don’t forget that mental incapacity doesn’t necessarily mean someone is old; the person may just seem old because of incapacity. 

Here are ten things advisors and producers need to consider to avoid committing elder abuse on their clients:

1. Encourage older clients to begin their engagement with you by including chosen family members (assuming there are family members).

2. If older clients have outlived immediate family, tactfully discuss if there are long-time friends, neighbors, or friends of faith that they would invite to begin the engagement.

3. There are times when older clients have long-lasting relationships with bankers, trust officers, or attorneys. As appropriate, welcome the new clients to invite these professionals to the first meeting.

4. If convenient to the new older clients, suggest meeting in their home, and then alternate later meetings between their home and your office. 

5. Use a cognitive skills test with clients at the outset of the engagement.

6. Ask for permission to obtain a letter of “good physical and mental health” from the client’s personal physician. The explanation is that it may help you to protect the client’s estate or legacies against a post-death complaint that the “parent” was impaired and the advisor should have readily known. 

7. Slow down; use diagrams. Check in frequently: “Does this sound like it makes sense to you?” Ask the client to repeat back what they understand of the current discussion or decisions being made.

8. Make an audio or video at each meeting with all clients. “Ms. Smith, rather than having my attention diverted into my yellow pad as we talk about your financial situation and goals, if it’s OK with you, I’d like to tape this and future meetings. We’ll get you a copy within twenty-four hours so you and I can independently review details we might have missed in the conversation. Is that OK?

9. Technology makes it possible to have “virtual” meetings by audio and/or video conferencing that inherently facilitates maintaining audio and video records of those meetings. This becomes more critical when documents are going to be executed.

10. Have a staff member reach out to older clients more often than the engagement might require, just to maintain a connection. A simple “How are you doing?” conversation may also provide insight into declining health or failing cognitive ability. 

Professionals in law and tax, as well as planners in the fields of investment, insurance, estate and retirement, generally hold a position of trust with their clients, providing ongoing advice and consultation about their client’s personal and business issues. Yet even the smartest and best intended professionals may fail to notice a client’s cognitive degeneration and find themselves unwittingly entangled in a regulatory or criminal proceeding. 

Even if avoiding such onerous experiences in the short-term, an unhappy heir may sue a professional many years after a service has been performed with the accusation of neglecting to detect mental incompetence. All client-facing advisors would be well advised to consider devising policies and procedures within their practices—communicated and practiced by staff members—for the benefit of their clients and their own protection. •CSA

Richard M. Weber is founder and president of The Ethical Edge, Inc., in Pleasant Hill, California, providing fee-only life insurance analytics and consulting services to family offices and high net worth individuals. He currently serves as Chairman of the Foundation for the Society of Financial Service Professionals. Contact him at or visit www.

A. Frank Johns is Principal Partner at Booth, Harrington, and Johns of NC, in Greensboro and Charlotte, North Carolina. A specialist in elder law and fiduciary litigation, he is a certified elder law attorney by the National Elder Law Foundation, Adjunct Professor of Law on the faculty of the LLM Elder Law Program of Stetson College of Law, and is a Visiting Associate Professor at the University of North Carolina at Greensboro. Contact him at 336-275-9567, or visit

Assessing Client Cognitive Function: Legal Pitfalls was recently published in the Winter 2015 edition of the CSA Journal.

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