Hedge finances against cognitive decline
Financial advisers with clients who are unprepared for impaired financial decision-making skills due to cognitive decline as they age are vulnerable to loss of business from disgruntled clients and their family members, regulatory actions, and even lawsuits.
That was the warning from a State Street Global Advisors paper titled ‘The Ageing Brain: The Impact of Ageing on Financial Decisions', which said financial decision-making is one of the first skills to decline due to age and cognitive decline.
The study said that investors were often unaware or in denial about this, which could "lead to a catch-22 for advisers who face legal and business risks when clients are experiencing cognitive decline".
The firm's vice president and head of practice management, Brie Williams, told a media roundtable that while a person's financial capacity diminishes after age 60, their confidence levels remain the same.
"We live in folklore of invincibility, we're taking on more risk, than we should be," Williams said.
"The behavioural patterns that investors go through when you ask them to think about changes to their cognitive ability [include] fear of loss of independence, anxiety about mortality, an aversion to possibly the complexity of this kind of conversation, lacking in self-awareness where we can be overly optimistic, and we just procrastinate."
The study found that while 72 per cent of advisers thought they provided sufficient information and support on the impacts of ageing on their financial decision-making, only 27 per cent of investors were satisfied with the level of support provided, and only 17 per cent talked to advisers about it.
Financial advisers must encourage clients to be proactive in managing risks associated with cognitive decline by initiating conversations long before cognitive decline sets in, with the optimal time to develop a plan is when clients are in their early to mid-50s when decision making abilities are at their peak.
Williams said financial advisers should broach the subject at the nascent stage of the adviser-client relationship and prepare a letter of intention, with written instructions on what should happen to their finances in the event of cognitive decline.
"[If] it's a diagnosis of Alzheimer's, and they say, ‘my father just got checked into the Alzheimer's ward, can you put me on the account?', at that point, action is too late or it's very complicated to take that step," she said.
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