A difficult challenge for multigeneration family offices is handling a leader who experiences cognitive impairment in a way that minimizes risk to the family. In such delicate situations, it’s key to have a plan, Bailey McCann reports.
Also in this issue, we highlight a new survey of family-office allocators that reveals some interesting findings about their interest in hedge funds.
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HANDPICKED: What to do when a leader’s cognitive impairment puts entire family at risk
By BAILEY McCANN
As more family offices stretch across generations, tensions can build when senior family members experience cognitive impairment — presenting a risk to the stability of the office by those leaders clinging to control or by being taken advantage of by younger members.
As many as 5 million older Americans are abused every year, and the annual loss suffered by victims of financial abuse is estimated to be at least $36.5 billion, according to the National Council on Aging.
Older wealthy people — such as Brooke Astor, Kasey Casem and Mickey Rooney — were all caught up in high-profile cases that cost their estates millions. Dr. Moira Somers, a neuropsychologist and family-wealth consultant, has experienced similar challenges with several of her recent clients — including a CEO diagnosed with mild cognitive impairment who could not make business decisions prudently and efficiently, as well as the heir apparent to a family business whose depression left him out of pocket during key critical decisions.
- Five million older Americans are abused every year, and victims of financial abuse lose at least $36.5 billion annually.
- Every family office should create an action plan for how it will handle the possibility of cognitive impairment within members of its leadership.
- If you suspect that a key member of your family office is experiencing a cognitive impairment, it’s important to address the issue head-on rather than ignore it.
- Powers of attorney or health care proxies should include more than one person. This can limit the ability of a single individual to use these documents to hide abuse.
For family offices, these cases serve as a warning — it's important to create an action plan now or put the family office at risk, say experts in the field. “It’s so important to be proactive to limit potential risks to the family without unnecessarily removing someone’s autonomy,” Somers said
- Having early and ongoing conversations with elders about long-term plans, health care wishes and finances.
- Having elderly people themselves work with financial advisers and attorneys to monitor accounts and implement new procedures, such as requiring two signatures for large transactions.
- Having powers of attorney or health care proxies include more than one person. This can limit the ability of a single individual to use these documents to hide abuse.
- Adapting governance structures to make it easier to flag impaired performance and develop succession plans that include baseline cognitive screenings for top personnel.
- Including third-party mediators or practitioners who have mandatory reporting requirements in a coordinated plan of care so that there are independent observers who have a duty to report questionable activity for investigation.
Cognitive impairment can often be difficult to spot or easy to write off. If someone of advanced age starts forgetting things, it can be easy to chalk it up to age and move on. Sometimes cognitive impairments may manifest themselves as decisions that don’t seem normal, or someone might become more withdrawn. Family members may not catch these changes early on — especially if the person doesn’t speak with someone every day.
Research conducted by Dr. Duke Han, a professor of family medicine at the University of Southern California’s Keck School of Medicine, has shown that a change in financial decision-making can often be an early sign of cognitive impairment. So can changes in how people relate to others either positively or negatively.
"We try not to speak about cognitive impairments through a purely ageist lens,” said Han, who focuses on neuropsychology. “These are factors that can be indicative of decline at any age, but they frequently impact older people. People may start thinking differently or losing track of things, and it has an impact on their finances or they get taken advantage of."
GO WITH GUT INSTINCT
When the signs are less obvious, family members may have to trust their gut and just bring up their concerns, even if they fear that the conversation might not be easy. Jane Walsh, chief deputy in the Denver District Attorney's Office, leads the office’s Elder and At-Risk Protection Unit. She herself was unaware that her father was the victim of a scam targeting older people until she found a card from a detective at his house.
Older people often don't bring up that they've been taken advantage of or are caught up in a bad situation because they feel embarrassed, Walsh said. "I think the scale of these crimes is much larger than anyone is aware of,” she said. “But the way they are investigated is patchy, and people know that and take advantage."
The advent of mandatory reporting on the part of financial professionals, lawyers and health care practitioners is catching more cases, but Walsh said more work remains.
Philip Marshall agrees. He was engaged in a long legal battle with his father after reporting abuse against his grandmother, socialite Brooke Astor, in 2006. When she died in 2007, her estate was worth an estimated $192 million, including a trust. Marshall’s father was convicted, as was Astor's estate-planning lawyer, based on the testimony of Marshall and others. Marshall has since launched a foundation focused on elder justice called Beyond Brooke.
"What I tell people is follow your heart and then follow the money," he said, adding that financial advisers have emerged as a front line of defense because they watch the accounts and often are the first to see when something looks out of the ordinary.
Marshall hopes to see protections beyond mandatory reporting. He'd like to see power-of-attorney provisions updated so that individual giving is better protected. When people get older, they often assign a power of attorney and health care proxy to make decisions for them if they are incapable. Typically, individuals choose people they already know and trust to fill these roles.
Each state also treats these roles differently, and the levels of protection given to the elderly person if a problem arises can vary significantly.
"Power of attorney can be used as a shield and a weapon," Marshall said. "My father hid behind his power of attorney — it was a key part of his defense."
Splitting the power of attorney between two people might help others avoid a similar situation, Marshall said. In addition, requiring two or more signatures on large financial transactions can make it more difficult for outside actors to move money without facing questions.
PICK YOUR PROXY WITH CARE
It's important for individuals to think carefully about whom they choose to fill these roles, said Alison Hirschel, director and managing attorney at the Michigan Elder Justice Initiative. In the cases that make it to her desk, Hirschel most often sees abuse happening at the hands of family members, pastors or faith leaders, or close advisers –– any of whom might seem like natural people to fill a power-of-attorney or health care proxy role.
Encouraging the older person to meet with a neuropsychologist can also be helpful. Neuropsychologists will assess for any deficits and also take into account whether medications or other health interventions might be causing a change. In some cases, if the decline is the result of medication, the condition can be reversed. If the decline is the result of something more permanent, like Alzheimer's, it's important to start building a plan of coordinated care early.
In her work with wealthy families, Somers suggests including business concerns in the care plan. Working with the impaired person to understand whether he or she still wants to be involved operationally with the family office can help family members and family executives understand where someone sees his or her role and abilities going forward, she said. Somers has also seen some family offices implement regular performance assessments for everyone, including the executive team. This can help spot issues before they become problems and also remove any concerns about ageism.
“Performance can also be impacted at any age for a whole variety of reasons,” Somers said, “so a once-a-year check-in can be a risk mitigation tool.”
If a family office works with an executive board, involving one or several board members in the planning can help keep conversations neutral and productive in limiting business risk, Somers said.
A plan of coordinated care should include all aspects of the family and almost be treated as part of continuity planning, said Sam van Kalkeren, director of aging services for the O'Connor Professional Group, which provides concierge care services for family offices. It’s important that the family is on the same page, van Kalkeren said, and that organizational plans are in place to allow the impaired person to maintain as much independence as possible while also making sure that any responsibilities being handled by others are shared as evenly as possible.
As part of its approach to care, the O’Connor Professional Group focuses on family relationships. Families often don’t think through situations even if they have a plan in place, van Kalkeren said.
“If something happens where someone needs to be moved into assisted living, for example, and they haven’t already built that relationship with the provider, they can end up on waitlists for years,” he said.
Other factors including aggression or a negative attitude can also keep someone from being accepted at a home, which means families have to bring that staff in-house and often at significant expense. Until those people have been hired, family members may have to fill in the gaps in care. Financial and business plans can be affected in these cases if advisers are not included early on in creating a care plan.
Van Kalkeren also has seen cases where adult children have difficulty agreeing to provisions that the elderly person might want, such as enacting do-not-resuscitate orders or declining other forms of care. Working with a neutral third party to create the plan can help ensure that the wishes of the older person are kept intact, even if family members or others have different desires, he said.
"Often, older people are used to being leaders, or not every child will want to be involved,” he said. “Maybe advisers need to be made aware so they can plan on the business side. We try to help mediate those dynamics and create something that's workable.
“But families have to be proactive. If you're reaching out when someone is in crisis, it really limits what you can do to respond."
Survey: Family offices increasing their interest in hedge funds
By ERIN CHAN DING
The appetite for family offices investing in hedge funds will grow over the next year, according to survey results released last week.
More than half of 555 investment-fund allocators — composed mostly of single- and multifamily offices and funds of funds — said they would be increasing their investments in hedge funds over the next year.
Of those, 44% said their investments would increase by at least 10% or more, according to those surveyed by iConnections, a financial technology platform.
About two-thirds of allocators said they were either optimistic or very optimistic about hedge funds. They were especially keen on investing in global macro- and multistrategy funds, the survey found.
Overall, hedge funds were down 2.4% in 2022. But that compares favorably with global equities and bonds — which were down 20% and 16.7%, respectively, over the year.
"We have been increasing our allocation to hedge funds as well as other alternative investments over the past 2½ to three years," said Thomas Ruggie, CEO of Destiny Family Office in Winter Park, Florida. The Destiny Alternative Fund's portfolio is 69% hedge funds and 25% private equity due to the long-term performance and risk measurements "of underlying managers compared to broad market indexes."
Total assets in money funds hits new record: The amount of cash parked in money-market funds climbed to $5.25 trillion in the past week, although the pace of inflows has slowed from the recent breakneck speed, Bloomberg News reports.
Crypto billionaires lost $110 billion in the past year: Amid fraud charges, government investigations and tanking valuations, cryptocurrency billionaires have seen their net worths plummet from $140 billion to just $30 billion in the past year, according to Forbes.
Singapore has OK’d more than 100 family offices so far in 2023: Wealthy families are increasingly relocating to the city-state, drawn to its pro-business regulations and strong rule of law, reports CityWire Asia.
Help us with a story: We’re working on a story about the art market and how to make sure that families make smart decisions when handing down those assets to the next generation. If you have any comments on the topic, reach out to [email protected].