As we age, it’s common to experience some form of cognitive decline. Our thinking may slow down or we may have trouble remembering facts and figures; complex mental tasks begin to feel more difficult, and we may have trouble focusing. Cognitive decline can vary widely in severity – some people may experience only minor impairments to cognitive function, while others may develop dementia (a more serious set of impairments that interfere with daily life). In the US, two out of three people will experience some form of cognitive impairment during their lifetime1.
For a financial adviser working with older clients, familiarity with cognitive decline is essential. Impairments can result in substantial wealth losses if unnoticed or unaddressed by family members or advisers; later life is full of major financial events like healthcare-related transactions, investment draw-downs, legacy planning and relocating; all of these can be complicated by diminished cognitive capacity.
Clients with milder impairments may not notice an impact on their financial acumen, which may cause increased financial vulnerability. One study, for example, found that reduced financial capabilities were an early indicator of neurodegenerative diseases like Alzheimer’s – financial mishaps like missed credit payments were frequently observed years before clinical diagnoses².
Assessing investors perception and preparation
In 2020, Vanguard conducted a major a survey of US investors to learn more about levels of preparation for cognitive decline among individuals over the age of 55.The median age of respondents was 74, and the median net worth was $1.6 million. Most participants were married with children and had retired. It’s important to note that the research paper referenced throughout this article is based on a study of US investors and therefore the rules and requirements and terminology mentioned in the document may be different to those in other markets.
Preparedness among different age groups
For financial advisers, the survey contains a large volume of useful data. For example, most participants reported some level of preparation for later-life events like cognitive decline – a positive finding.
75% reported having prepared a living will. A living will is a document specifying what actions designated agents, often descendants, should take if the subject should become seriously ill or incapacitated. Living wills include provisions for medical treatment as part of end-of-life care.
71% had prepared a power of attorney (POA) plan, which authorises a designated person to act on behalf of the subject. POAs can be medical, granting a nominee decision-making power over healthcare decisions, and financial.
56% of respondents had undertaken a degree of account consolidation, a process by which assets are combined in a single location rather than spread across multiple investment providers.
33% of respondents had created revocable trusts, which allow trustees to manage assets selected by the trust creator after death. Trust creators can design terms for the distribution or investment of trust assets, which trustees have legal duty to follow – often, assets in a trust are disbursed to beneficiaries selected by the trust creator.
25% of respondents had long-term care insurance. The lowest level of planning was seen in developing guidelines for transfer of financial control, with just 4% of respondents reported having made preparations in this area.
Across the board, older investors were found to have planned more extensively. 87% of respondents aged 85 and over had a living will, for example, while the figure for the 55-64 age group was 61%. 89% of the 85+ age group had power of attorney plans, while the figure for the 55-64 age group was 52%.
As the results show, your middle-aged clients may be less prepared for later-life events, and may view these forms of planning as a concern for the future rather than for today. You can provide targeted support here, by making clients aware of the importance of robust later-life planning and the numerous challenges that cognitive decline can introduce for individuals and their families.
As the results show, your middle-aged clients may be less prepared for later-life events, and may view these forms of planning as a concern for the future rather than for today. You can provide targeted support here, by making clients aware of the importance of robust later-life planning and the numerous challenges that cognitive decline can introduce for individuals and their families.
Transferring control
For investors who do suffer from some form of cognitive impairment, deciding when to transfer financial control – and to whom – is a major decision. The Vanguard survey3 of US investors shows that preparedness is lowest in this area: 10% of respondents aged 85 and over had developed guidelines for the transfer of financial control. The figure was even lower for the 75-84 age group, at 4%, and the figure for the 65-74 and 55-64 groups was just 3%.
Despite low average levels of preparedness, the investors had a range of views on how a transfer of control could and should play out in the event of material cognitive decline.
Most of the investors polled—70%—said that they would nominate one of their children, or a son or daughter in law, as their agent in the event of cognitive impairment. For investors without living children, siblings were a popular choice of likely agent (10%). Other nominations included friends, nieces, nephews, trustees and institutions. 2% of the survey group were unsure of who they would name.
Positively, a majority of respondents assessed their choice of agent as well-equipped to deal with the demands of the role. 83% rated their likely nominees as highly capable of understanding the investor’s needs and desires in the event of cognitive decline; 82% said that their choices would have a strong understanding of the investor’s financial situation, with 81% of participants assessing the nominees’ overall understanding of finance as good in general; and 87% said they felt confident that their nominee would diligently look after the investor’s interests.
8% of respondents said that the ideal time to transfer control was at the onset of cognitive decline. 84% said the right time would be further into decline, but before complete incapacity. Finally, 8% said that the right time would be after incapacity.
Some participants noted the risk that transfers of control might not happen as planned. On average, respondents estimated a 35% chance that any transfer would take place later than their preferred time. Among the possible reasons for a mistimed transfer, the factors viewed as most likely were the subject not recognising their own decline, and the subject not wanting to give up control in spite of their decline.
Expected costs of a mistimed decline were heterogenous. Wealthier participants expected higher costs overall – participants in the 75th wealth percentile reported expecting an average of 30% of their wealth being lost as a result of poor timing.
Insights for advisers
If clients are to be adequately supported, understanding and addressing the risks surrounding cognitive decline is of central importance. Financial advisers must recognise the significance of cognitive decline in wealth and health planning, and the need for collaboration between clients, family members, agents and beneficiaries. When preparing for cognitive decline and the transfer of financial control, prioritise holistic planning; the transfer procedure is a major undertaking, involving input from a large number of participants – clients, advisers (and any relevant third parties they use), family members, beneficiaries and agents.
Your clients should be equipped with a full understanding of the financial risks associated with cognitive decline. While clients may understand the dangers of a well-understood form of decline like dementia, it is important that they are also aware of the risks of milder or periodic forms of cognitive impairment. These forms of decline may be less noticeable by clients and their loved ones, but their impacts on the client’s finances can be substantial.
In your engagement with clients, introduce the topic of cognitive decline early, as a regular element of your planning activities. Clients may have given only limited thought to the issue, or may prefer to avoid it entirely due to discomfort. Delaying the conversation, as shown earlier in this article, can have dangerous impacts on the client’s wealth. For advisers, initiating discussion of the subject early and in detail is an important aspect of your responsibility to clients – you have a duty to equip them with material, decision-useful information, and tackling the topic of impairment far in advance of the possible onset of symptoms provides clients with the maximum space to make preparations. Discussions can also help to give the client a sense of control over the future direction of their finances, and confidence that the eventual transfer structure will be tightly planned and robust.
There are also emotional benefits to early discussions of cognitive decline. Routinising the issue and presenting it as an everyday aspect of financial planning can help to assuage fears and doubts, removing some of the uncertainty and helping the client to view cognitive decline as one of many financial problems to be managed rather than a source of anxiety and stress. Establishing guidelines for transfer of control to an agent early in the planning process is particularly important. While such advance preparations can have massive benefits for clients and other stakeholders, they are frequently neglected, causing avoidable difficulty down the line.
As mentioned above, cognitive decline can manifest early in financial decision-making. Financial advisers, therefore, may be among the first to notice impairment in a client, especially if they meet and engage with the client on a regular basis. You may need to involve family members and other stakeholders where appropriate, such as medical and legal professionals, so that support provisions can be made as rapidly as possible and your transfer plan can be enacted.
Ensure that your client has ready access to the necessary legal documents and legal advice, and hold appropriate conversations with family members and medical providers to ensure that the full range of the client’s financial and health-related desires are recorded and understood far in advance. Likely agents, for example, should be nominated as early as possible and should understand in full the duties of the role. They should sign agreements promising to fulfil the duties involved, and should have access to your support as an adviser throughout the process. Any changes to the wishes of the client or their agent should be documented, and agent availability and capacity should be frequently checked and reconfirmed.
In the event that the financial control is transferred, advisers may retain a close working relationship with the assigned person (subject to the choices of the client). Ideally, clients will nominate a capable, responsible agent with a solid understanding of their finances; however well-versed in financial matters the agent, regular contact will likely be necessary to ensure that the client’s wishes are being carried out effectively and that adequate capital stewardship is being performed. Advisers may also consider providing logistical assistance in cases where the agent doesn’t live in close proximity to the client, such as supporting a trustworthy local contact who can liaise with both client and agent.
Some investors, especially those without children, name an agent who is from the same generation – a trusted spouse, friend or business partner, for example. This can concentrate the risk of cognitive decline. In your engagement with clients, be sure to explain this risk, and recommend that they consider nominating a younger person as sole or co-agent. A multigenerational approach to agent selection can help to mitigate cognitive decline risk, and the use of multiple agents can help to alleviate stresses that a single agent might experience. Financial advisers themselves can fulfil the role of agent if nominated.
Takeaways
Cognitive decline is common in later life, and can manifest with varying degrees of severity. Advisers should help clients to prepare for cognitive impairment as early as possible.
Cognitive impairment can cause significant wealth losses if left unaddressed. Early signs of decline can be found in difficulty with financial decision-making, and issues like missed credit payments can often function as leading indicators of clinical diagnoses. Clients with milder impairments may not notice an impact on their financial acumen.
Preparations vary among investors, according to a Vanguard study of US investors. Older investors tend to be better prepared, though only a small section of the survey group reported having developed guidelines for the transfer of financial control to an agent in the event of severe cognitive impairment or incapacitation.
To support clients, advisers should introduce the topic of cognitive decline as early as possible and ensure that clients are familiarised with the associated risks. Holistic planning, involving family members, beneficiaries, potential agents and other stakeholders should be conducted far in advance to mitigate risks effectively.
1 Source: National Library of Medicine: “Cognitive impairment in the US: lifetime risk, age at onset and years impaired”, 2020.
2 Source: National Library of Medicine: “Financial Presentation of Alzheimer Disease and Related Dementias”, 2021.
3 Notes: The research paper referenced in this article is based on a study of US investors and therefore the rules and requirements and terminology mentioned in the document may be different to those in other markets.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Important information
This document is directed at professional investors and should not be distributed to, or relied upon by retail investors.
The information contained herein is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information does not constitute legal, tax, or investment advice. You must not, therefore, rely on it when making any investment decisions. The information contained herein is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.