Financial planner Mike Haubrich recently faced the problem of financial incapacity when a widowed 85-year old client came to his office with some questions about gifting. The client was accompanied by her "new best friend," who happened to be a neighbor:
"I ask Agnes who she is thinking about giving money to. She wants to give it to her new best friend. I asked her 'how much do you have in mind, Agnes?' Without skipping a beat, she answered 'How about $50,000?'"
He continues: "I was blown away. I'd never heard her mention this best friend's name in our previous meetings — ever. I ask her if she knows how much money she has, and Agnes says she doesn't know how much nor care about her money anymore. She'd always known everything about her investments, so this is new and concerning."
Americans are living longer, especially wealthy clients who have gained about five years on average in longevity over the last three decades after the age of 65. Longer lives present a number of challenges to advisors. We decline physically as we age, resulting in higher expenditures on health care and long-term care. We also decline mentally. Research on cognition in old age shows that natural cognitive aging chips away at our financial decision-making ability each year. And cognitive diseases such as Alzheimer's can make seniors particularly vulnerable to financial mistakes.
Managing wealth in retirement is more than just planning income, health care, and taxes. Retirees also need to plan for cognitive decline that erodes their ability to manage wealth independently.
As much as $50 billion each year flows from retiree accounts as a result of financial abuse — sometimes by strangers, but often by family members and caregivers. Reduced financial capability coupled with social isolation in old age may present a greater risk to a retirement plan than volatile markets. And more advisors are insisting on creating a plan for cognitive decline in order to avoid the legal, financial and emotional costs of dealing with financial exploitation when a client is no longer able to solve the problem on their own.
For advisors trusted with helping a client preserve a nest egg, dealing with financial mistakes can place an advisor in a frustrating and confusing position: either watching helplessly as a client's financial security is compromised, or risking the client's privacy and autonomy by seeking ways to prevent a scam. The reality is that many older clients do not understand that they are losing their ability to make sound decisions and will often resist any attempt to take away control over their finances.
At the recent Pension Research Council conference at the University of Pennsylvania Wharton School, a session was devoted to the important topic of dealing with the financial consequences of age-related cognitive decline. The main takeaway from the session was that elder fraud is rampant and, unless an advisor and client plan for incapacity, there are few easy solutions for advisors when strangers or relatives take advantage of vulnerable clients.
Of those who live into their 80s and beyond, a surprisingly high percentage will eventually experience symptoms of dementia. Advisors, regulators and the existing legal environment are ill equipped to deal effectively with the millions of elderly Americans who won't be able to manage their own financial affairs. Some have termed the financial vulnerability of elder Americans a pandemic, one that encourages abuse and devastates families who feel powerless to shield older relatives from exploitation.
Wealth and Cognition
Americans over 60 hold over half the financial assets in the United States, according to 2013 Federal Reserve Board statistics. This will increase in the future as a new generation of Americans retires with defined contribution savings, which they will need to manage on their own instead of relying on an institution to provide a defined benefit pension.
To understand how greater control of financial assets in retirement increases exposure to financial abuse, it is important to recognize how our brain changes as we get older. Performance figures on tests of memory show a nearly linear decline after age 60. Executive function, or our ability to analyze a new piece of information by retrieving existing knowledge and processing a response, also declines as we age.
This means that our ability to judge the motives of, say, a friendly neighbor who smiles and makes conversation can deteriorate in old age. Or when a child or other relative who may have had little interest in an elderly parent suddenly starts making visits. An elderly relative may welcome the attention and lack the ability to examine critically a potential predator's motives. Increasing social isolation in old age makes us more willing to invite the attention of those whose motives are suspect, and makes us less able to recognize when someone is motivated by fraud.
This combination of high financial assets and declining cognitive skills creates an opportunity for those who are willing to take advantage. One of the saddest aspects of elder abuse is the wedge it can present in family dynamics when less scrupulous adult children take advantage of an older parent to gain access to their assets. And other children may feel a mixture of guilt for not spending time with the parent, as well as harboring suspicions that a more attentive sibling appears to be motivated only by financial gain.
Sheryl Sherrard, director of financial planning at Clearview Wealth Management, relayed a story about a female client whose adult child had convinced his parent to transfer assets into his account in order to 'help her become Medicaid eligible.' "I asked my client whether she fully understood what Medicaid eligibility means. It means that she won't have access to better quality care."
