With demographics rapidly shifting in age and wealth, advisers need to help their clients better hedge against cognitive decline that is expected to compromise their financial decision-making, according to State Street Global Advisors (SSGA).
The study, titled “The Impact of Aging on Financial Decisions”, revealed that as the population continued to age, cognitive decline was set to become one of the most challenging intergenerational issues facing the investment industry, especially as the focus of financial advice had traditionally only been on saving for retirement.
However, one of the biggest problems and most common behaviour patterns observed in investors was the avoidance of dealing with the issue, driven by fears of losing their financial independence often resulting in lack of action.
The study also warned that while investing skills usually started to deteriorate sharply in one’s 60s and 70s, often their self-assessment remained intact resulting in a relative increase in overconfidence.
Cognitive performance consisted of two neural systems: the first one was “fluid intelligence”, which peaked at around 20, and the second one “crystalised intelligence”, defined as a combination of general wisdom and experiential knowledge, levelling off in a person’s late 60s.
This meant that on average the ideal time to develop a proper plan for investors was in their 50s.
According to SSGA, only 39 per cent of investors had a suitable plan in place should their financial-making abilities diminish, while 72 per cent of advisers provided investors with information and support about the impact of ageing.
At the same time, only 27 per cent of investors admitted they were satisfied with the level of information and support provided, which proved a disconnect between the investors and their advisers.
“Advisers can help clients clear these hurdles by developing a holistic financial plan that takes into account the potential for cognitive decline,” the study says.
“Addressing the risks of cognitive decline early on and before the onset of any symptoms enables the adviser to neutralise what could have become a sensitive topic that’s difficult to discuss.”
SSGA stressed that the financial services industry had to see managing risks of cognitive decline and its impact on financial decision-making process as a strategic issue and should accordingly establish certain standards around this.
