The acuity of peoples' financial decision-making peaks around the age of 53 and then declines steadily along with their diminishing cognitive capabilities, finds a new Brookings Institution study, "The Age of Reason: Financial Decisions Over the Life-Cycle With Implications for Regulation." Results of the study revealed important information about the older client for those in the financial services industry.
- Cognitive functions such as memory, reasoning and spatial perception decrease by about 1 percent annually and can be accelerated by various types of dementia.
- Conversely, experience, which aids decision making, increases with age. The combination of experience plus cognitive capabilities peak in the early 50s, then decline.
- Based on 10 types of financial choices, such as the transfer of credit card balances and negotiation of home-equity loan interest rates, the study found that people in their late 40s and early 50s are the most adept at making the optimal financial decisions.
- "We estimate that, for home-equity lines of credit, 75-year-olds pay about $265 more each year than 50-year-olds, and 25-year-olds pay about $295 more."
What it means for financial advisors:
- The older clients get, the more you should be advising them: They could reduce the number of debt-related transactions where they might wind up making expensive mistakes.
- It's with older clients that a trusted advisor's long-term investment in behaving ethically and building empathy really pays off: They are more likely to need the services of a financial advisor to help them think through complex choices but still worry about being exploited by an unscrupulous advisor.
