Financial Capacity

Financial capacity (FC) is a medical-legal construct that represents the ability to independently manage one’s financial affairs in a manner consistent with personal self-interest. FC thus involves not only performance skills (e.g., accurately counting coins/currency, completing a check register, paying bills) but also the judgment skills that optimize financial self-interest.

From a legal standpoint, FC represents the financial skills sufficient for handling one’s estate and financial affairs and is the basis for determination of conservatorship of the estate (or guardianship of the estate, depending on the state legal jurisdiction). Broadly construed, FC also encompasses more specific legal “financial capacities,” such as contractual capacity, donative capacity, and testamentary capacity. Thus, FC is a very important area of assessment in the civil legal system.

From a clinical standpoint, FC is a highly cognitively mediated capacity that is very vulnerable to neurological, psychiatric, and medical conditions that affect cognition (such as dementia, stroke, traumatic brain injury, and schizophrenia). Financial experience and skills also vary widely among cognitively normal individuals and are associated with factors of education and socioeconomic status. Clinicians are increasingly being asked by families, physicians, attorneys, and judges to evaluate and offer clinical opinions regarding FC.

With the recent development of conceptual models of FC and associated assessment instruments, there is an emerging body of empirical research on this important civil capacity.

Importance of Financial Capacity

Impairment and loss of FC has important psychological, economic, and legal consequences for patients and family members. Similar to driving and mobility, the power to control one’s finances is a fundamental aspect of individual autonomy in our society. Loss of financial control may result in psychological consequences such as increased feelings of dependency and depression. Declines in FC are also associated with immediate and long-term economic consequences. Failure to pay bills or difficulty in handling basic financial tasks may result in disconnection of services, property repossession, poor credit ratings, and even homelessness. Impaired financial judgment may also result in loss of assets intended for long-term care or inclusion in a will or trust. From a legal perspective, diminished FC is associated with increased risk of financial exploitation in the form of consumer fraud and other scams, as well as greater susceptibility to undue influence by family members and third parties. As noted above, some situations of financial incapacity may reach the courts and result in loss of decisional autonomy and the appointment of a conservator (or guardian) by the court to protect the person and his or her estate.

Conceptual Model of Financial Capacity

Early conceptual formulations of FC were anemic and limited to unelaborated descriptions such as “money management skills” or “financial management skills.” In actual fact, FC is a complex, multidimensional construct representing a broad range of conceptual, pragmatic, and judgmental skills. This multidimensionality is reflected in the concept of limited financial competency recognized across state legal jurisdictions, where an individual may still be competent to perform some financial activities (e.g., handle basic cash transactions, write small checks) but no longer others (e.g., make investment decisions or asset transfers). In addition to multidimensionality, a conceptual model of FC should incorporate the dual performance and self-interest perspectives discussed above. For example, persons with schizophrenia may have adequate financial performance skills but lack FC because they consistently make poor judgments about how to spend their government entitlement monies.

Marson and colleagues have proposed a clinical model that conceptualizes FC at three increasingly complex levels: (1) specific financial abilities or tasks, each of which is relevant to a particular domain of financial activity; (2) general domains of financial activity, which are clinically relevant to the independent functioning of community-dwelling older adults; and (3) overall FC, or a global level. This conceptual model of FC currently comprises 9 domains, 20 tasks, and 2 global levels. The 9 domains include basic monetary skills, financial conceptual knowledge, cash transactions, checkbook management, bank statement management, financial judgment, bill payment, knowledge of personal assets and estate arrangements, and investment decision making. As discussed, each domain of financial activity is further broken down into constituent tasks or abilities that emphasize understanding and pragmatic application of concepts relevant to a specific domain. For instance, the domain of financial conceptual knowledge involves understanding concepts such as loans and savings and also using this information to select advantageous interest rates. Similarly, bill payment involves not only understanding what a bill is and why it should be paid but also accurately reviewing a bill and preparing it for mailing. Finally, clinicians are usually asked by families and the courts to make clinical judgments concerning an individual’s overall FC. Such global judgments involve integration of information concerning an individual’s task- and domain-level performance, his or her judgment skills, and informant reports. Such global clinical judgments are particularly relevant for guardianship and conservatorship hearings.

Methods for Clinically Assessing Financial Capacity

At present, there are at least three major approaches to assessing FC: clinical interview, patient/informant ratings, and direct performance instruments. The clinical interview is the traditional, and currently the primary, method for evaluating FC. At the outset of an interview with a patient (and family members), it is important that a clinician first determine the patient’s prior or premorbid financial experience and abilities. For example, it would be inappropriate to assume that a person who on testing demonstrates difficulty writing a check has suffered decline in this area if he or she has never performed this task and/or has traditionally delegated this task to a spouse. Once the premorbid experience level is established, clinicians need to identify the financial tasks and domains that make up the patient’s current financial activities and differentially consider those required for independent living within the community. The level of impairment on a specific task or domain should be carefully considered. Individuals who require only verbal prompting to initiate or complete a financial task (e.g., paying bills) are qualitatively different from individuals who require actual hands-on assistance and supervision in paying bills; both, in turn, differ from individuals who are now completely dependent on others to pay their bills.

A second approach to assessing FC involves the use of completed patient and informant rating forms. Clinicians commonly use observational rating scales to supplement their clinical interview. Observational rating scales are typically completed by the patient and/or a knowledgeable informant, such as a spouse, parent, or adult child. They can provide valuable “real-life” information about an individual’s current financial functioning and also about changes in functioning over time. At the present time, however, there are few rating forms available that are specific to FC. Most of the rating forms are designed to gauge performance across a spectrum of basic and advanced activities of daily living and therefore may yield only limited information specific to financial performance.

A weakness inherent in patient/informant rating forms (and also clinical interviews) is reporter bias. Both patients and informants can misestimate a patient’s FC and other functional abilities, owing to a number of factors including lack of insight, denial, and psychiatric issues. Dementia patients and hospitalized elders have been found consistently to overestimate their functional abilities, including financial skills, relative to results of performance-based functional assessment measures. Similarly, even over a short period of time, spousal caregivers of persons with Alzheimer’s disease (AD) can be unstable in their ratings of FC in their spouses. Despite these limitations, clinicians justifiably rely on interviews and informant reports of FC due to their ease of administration, minimal cost, and overall information yield.

Performance-based instruments represent a third approach to assessing FC. In contrast to clinical interview formats and observational rating scales, performance-based instruments are not subject to reporter bias. Instead, individuals are asked to perform a series of pragmatic tasks equivalent to those performed in the home and community environment. Performance-based measures are standardized, quantifiable, repeat-able, and norm referenced, and thus results can be generalized across patients and settings. These measures, thus, can provide clinicians and the courts with objective information regarding the performance of specific financial tasks that can be highly relevant to the formulation of recommendations and treatment strategies.

Weaknesses of performance-based measures should also be noted. Performance-based measures conducted in a laboratory or clinical office setting cannot take into account either the contextual cues or the distractions within the home environment that may assist or interfere with a person’s abilities to perform everyday financial tasks. These instruments are more difficult and time-consuming to administer. They usually require specialized equipment and training, which can make them costly relative to observational rating scales.

Research on Financial Capacity

The lack of conceptual models and assessment instruments specific to FC helps explain the relative lack of clinical research in this important area of civil competency assessment. Only recently have systematic empirical studies of FC been conducted in clinical populations. These studies have investigated patterns of FC impairment in patients with AD and mild cognitive impairment (MCI).

Studies by Daniel Marson and his group have demonstrated significant impairments of financial abilities in patients with both mild and moderate AD. At the domain level, patients with mild AD performed significantly below normal older adult controls on all domains of financial activity, with the exception of basic monetary skills. Patients with moderate AD per-formed significantly below controls and persons with mild AD on all financial domains.

At the task level, patients with mild AD performed equivalently with older controls on simple tasks such as naming and counting coins and currency, understanding the parts of a checkbook, and detecting the risk of mail fraud. However, such patients had difficulty performing more complex financial tasks such as applying financial concepts (i.e., choosing the best interest rate), obtaining exact change for vending machine use, understanding and using a bank statement, and making an investment decision. Patients with moderate AD were substantially impaired on all financial tasks, relative to both normal older adults and persons with mild AD.

At the global level, mild-AD patients showed substantial impairment in FC relative to older controls, and moderate-AD patients were impaired relative to both controls and mild-AD patients.

Based on these initial findings, Daniel Marson and his group have proposed preliminary clinical guidelines for assessment of FC in patients with mild and moderate AD:

  1. Mild-AD patients are at significant risk of impairment in most financial activities, in particular complex activities such as checkbook and bank statement management. Areas of preserved autonomous financial activity should be carefully evaluated and monitored.
  2. Moderate-AD patients are at great risk of loss of all financial abilities. Although each AD patient must be considered individually, it is likely that most moderate-AD patients will be unable to manage their financial affairs.

Declines in FC have also been observed in persons with MCI. Relative to normal older adults, individuals with MCI demonstrated mild impairment in the domains of financial conceptual knowledge, checkbook and bank statement, financial judgment, and bill payment. More specifically, persons with MCI had relative difficulty with tasks requiring practical application of financial concepts, understanding and using a bank statement, and prioritizing and preparing bills for mailing. However, persons with MCI performed significantly better than persons with mild AD on most domain-level financial activities and task-specific abilities. However, not all patients with MCI demonstrated these impairments, suggesting heterogeneity in financial performance in this prodromal dementia group. Nonetheless, these results suggest that a significant, albeit mild, decline in financial abilities is an aspect of functional change associated with MCI and may play a role in the eventual conversion of MCI patients to AD. Accordingly, clinicians should monitor over time the FC of individuals with MCI.

References:

  1. Griffith, H. R., Belue, K., Sicola, A., Krzywanski, S., Zamrini, E., Harrell, L., et al. (2003). Impaired financial abilities in mild cognitive impairment: A direct assessment approach. Neurology, 60, 449—157.
  2. Marson, D. C., Savage, R., & Phillips, J. (2006). Financial capacity in persons with schizophrenia and serious mental illness: Clinical and research ethics aspects. Schizophrenia Bulletin, 32, 81-91.
  3. Marson, D. C., Sawrie, S. M., Snyder, S., McInturff, B., Stalvey, T., Boothe, A., et al. (2000). Assessing financial capacity in patients with Alzheimer’s disease: A conceptual model and prototype instrument. Archives of Neurology, 57, 877-884.
  4. Moye, J. (2003). Guardianship and conservatorship. In T. Grisso (Ed.), Evaluating competencies: Forensic assessments and instruments (pp. 309-389). New York: Plenum.
  5. Wadley, V., Harrell, L., & Marson, D. (2003). Self and informant report of financial abilities in patients with Alzheimer’s disease: Reliable and valid? Journal of the American Geriatrics Society, 51, 1621-1626.