Investing and the Aging Brain: ‘What Do I Do When I Get Stupid?’

Park believes that a power of attorney may not be necessary if a client has someone they can trust when an advisor begins to recognize cognitive decline. An HIPAA release can be combined with a medical power of attorney giving the advisor a right to disclose medical information. "Power of attorney gives people the power to do things. We don't even need that," he says. A waiver gives an advisor the ability to contact "a family member or attorney to make them aware that the client is about to give half their money to a charity you've never heard of. They may then be able to secure a legal remedy by getting the court to appoint them a guardian to protect the client."

According to Lauderdale, "client engagement letters can be particularly useful to facilitate and document further communication on how and when an advisor will respond when the client experiences diminished capacity." An attorney-in-fact, through a durable power of attorney, can give a guardian the ability to make decisions on the client's behalf. The attorney-in-fact should be given only to "a trusted family member or friend and should not be the RIA or broker/dealer," states Lauderdale. She recommends that the advisor encourage a client to sign documentation giving the advisor permission to discuss financial affairs with the attorney-in-fact. "The key is to have informed consent during times of capacity so that documentation is in place. There may be some pushback from clients as they fear losing independence and giving someone else permission to go against their wishes."

In Park's view, documentation that spells out a plan to deal with cognitive impairment is an essential part of the planning relationship. "We need to have somebody we can contact," he contends. "These contacts may not have the same privacy requirements. They can go to court and get an order to freeze an account or get a mental competency hearing in order to eliminate a tremendous amount of potential liability. We almost don't have an account where there isn't somebody else we can contact."

Advisors can perform a valuable role in recognizing reduced cognitive ability and preventing financial calamity if they have the tools to provide assistance. Without the appropriate legal authority, they are often powerless to help. Lauderdale notes that "when one's capacity is diminished beyond their ability to fully understand the facts related to their person and to make rational decisions with the facts as they understand them, they no longer have legal capacity to make decisions for themselves. This is challenging for planners because they are still your client and you are still supposed to follow their lead. While planning decisions still may be in the best interest of the client, a client may no longer have capacity to direct the transactions."

In order to avoid possible lawsuits from family members disappointed that a parent receiving professional financial management has squandered their inheritance or made them responsible for covering the expenses of an aging parent, a planner needs to be particularly cautious when recommendations are not being followed. Lauderdale notes that "if a client is making decisions that are not in their best interest and especially if they are not suitable, you must document decisions that are against your recommendations to protect yourself. When capacity is clearly lacking, an attorney-in-fact, via a durable power of attorney, will stand in the shoes of the client to make decisions on their behalf. The POA must have been executed prior to incapacity."

Diminished mental capacity can also lead to family conflicts when a client becomes more vulnerable to financial requests from family members. Harold Evensky, a financial planner in Coral Gables, Fla., finds that older clients will often bring a trusted child with them and he asks for permission to speak with either or both of them in the future. Evensky says that it is "relatively rare that we would talk to the child." Being given responsibility for addressing concerns about an aging parent's cognitive decline is "quite a burden on them, but that's part of the reality we deal with. There may be a responsible child and a spendthrift child that's had drug or mental [problems], and then we rely on the responsible child to help manage the issue."

Childless retirees, or those who have not identified a trusted younger guardian to help maintain their financial welfare in old age, can plan for diminished cognitive capacity early in retirement by making choices that reduce decision-making burdens later in life.

Professor Mandell believes that all of us need to acknowledge that cognitive decline is an important part of the retirement planning process. His encounter with the former student who asked about annuities underscored that point. By considering investment options that provide income without significant investment management input, and that lock up wealth to prevent losses from financial mistakes, the questioner was modeling a more informed approach that reduces the negative impact of cognitive aging.

"Here was a very smart guy who takes a course on investments and is smart enough to realize his cognitive ability is going to decline. He wanted to make sure that he was not going to screw up managing the assets that he and his wife will depend on for the rest of their lives."

 ———–

Michael Finke is a professor and coordinator of the doctoral program in personal financial planning at Texas Tech University.