How addiction can derail a client’s finances

Clients who have a gambling addiction or substance abuse issue are unlikely to volunteer this information to their advisor. But there are warning signs to heed before addiction derails a client’s finances, advisors say.
“We’re trained to recognize so many different activities and behaviours from our clients, from potential fraud attempts to money laundering to cognitive decline and elder abuse. But we’re not required to report on things like addiction,” says Karen Coyne, financial advisor at Clarity Planning in Hagerstown, Md.
Questionable account withdrawals aren’t necessarily a cause for alarm. When clients retire, for example, they may withdraw from assets frequently as they travel and engage in new activities. But advisors can watch for a combination of red flags that may add up to a substance or addiction issue, says Evan Parubets, head of advisory services at Steadyhand Investments in Toronto.
“What you’re looking for is a combination of a change in the redemption pattern – whether more frequent or larger amounts or even ad hoc amounts, as opposed to a consistent monthly amount,” he says. “Somebody who has an addiction doesn’t care about frequency. They just need the money now.”
Sometimes gut instinct comes into play. Mr. Parubets once communicated with a power of attorney who requested large withdrawals every other week on behalf of his mother who was in a long-term-care facility. But after some probing, it turned out the mother had no idea of the extent of her son’s withdrawals. By the time she found out, she lost half her assets to her son’s withdrawals, which were for his gambling debts.
When a client goes through a divorce, a job loss or the death of a spouse, child or parent, advisors need to pay close attention to how clients manage the aftermath, Mr. Parubets says. Grieving has no timetable and clients sometimes make poor choices as they cope.
He recalls one client whose husband died. She received a sizeable inheritance, which she invested, earmarking the funds for retirement. But she kept withdrawing the money for other things.
At first, Mr. Parubets surmised the pattern was normal under the tragic circumstances. “You’re in a period of your life when you’re fragile. Maybe you haven’t done the finances yourself all these years and so withdrawing money is not that unusual. And she always had a reason,” he says.
But he had a nagging feeling and sought answers. The client listed a trusted contact person (TCP) on their account. Through the TCP, Mr. Parubets learned the client often gambled as a way to deal with her grief. The TCP contacted the client directly, notifying her that Mr. Parubets was aware of the issue. The three of them ended up meeting as the client wanted solutions on how to stop herself from withdrawing from her assets.
Mr. Parubets proposed a dual consent for redemptions between the client and TCP.
“They both agreed and I ran the idea by compliance, who also agreed,” he says. “Since this was set up, the rate and quantity of redemptions dropped dramatically and the TCP has been aware of the reason for each withdrawal.”
Sometimes, the issue isn’t hidden at all. Alex Hadjisophocleous, a fee-only planner at Forest Financial Planning in Ottawa, has seen disproportionate amounts of some clients’ budgets devoted to alcohol and cannabis.
“It’s been labelled as such and they were comfortable enough to share it in the budget as a category,” he says.
Seeing the numbers made it easier for Mr. Hadjisophocleous to address the issue in a meeting as the clients wanted suggestions to improve their budget. After further discussions, he learned how clients were using substances to cope with sleep apnea or chronic pain.
“So, it’s a simple situation of finding the fact that they might have some kind of addiction,” he says.
Changes in behaviour may be a sign of trouble. For example, clients who like meeting in person now don’t want to meet at all – not even virtually – or gregarious clients suddenly clam up in meetings.
“We have pretty good relationships [with] clients and we can tell when things aren’t the same,” says Dave Martin, founder of Eltero Financial Partners Inc. in Halifax.
“With newer relationships, it’s very difficult to tell because you have no point of reference of changed personality. But with a lot of people, you can tell when their personalities change. They become more guarded and more defensive.”
In cases in which clients admit there’s an addiction, Mr. Hadjisophocleous tries to refer them to experts he knows. He also says it’s important to be comforting and supportive.
“Simply saying that you’re there for them can help them,” he says. “Encouraging them to seek help from their family and friends as well.”
There likely aren’t quick fixes when it comes to financial planning, but he suggests a few specifics to slow down the bleeding.
If a couple has joint accounts, he advises they move some of their money to personal accounts. “They could have a set amount in one account [for the person with the addiction],” he says.
Furthermore, the spouse with the addiction should probably lose access to an account that pays for the living expenses, he adds.
Another idea is to automate savings directly into investments that would be hard to touch right away.
“It’s classifying different accounts to help give more guidelines on what the accounts can do, but also still give the individual who has tendencies to spend money on gambling or alcohol to have some money,” he says.
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