For older clients with lower cognitive abilities, the way advisors present an annuity strategy is important. A study from researchers at the University of Missouri and Texas Tech University found that those types of clients are more likely to avoid retirement products like annuities that come with up-front costs for fear of losing that investment if they die earlier than they expected.
Michael Guillemette of the University of Missouri and Chris Browning and Patrick Payne of Texas Tech evaluated respondents’ working memory and numeracy, then asked them to consider two hypothetical risky investments. The scenarios had similar outcomes, but one had an up-front cost.
Respondents with lower cognitive abilities were less willing to take the investment with the up-front cost and required higher outcomes, the researchers found.
“The perfect storm is created as individuals age,” Guillemette said in a statement. “When they get into their 60s and especially 70s, it is natural to experience cognitive decline. This becomes detrimental when combined with the fact that as individuals age, they also become more confident in their choices. A certified financial planner who is a fiduciary could be beneficial because he or she could recognize those cognitive shortfalls and work in the individual’s best interest in terms of proper financial decisions.”
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The study divided respondents into two groups and asked each to consider two scenarios. In one, a relative offers them an investment opportunity that provides a 50-50 chance of paying them $115 or charging them $100. In the other, they have to pay $100 up front for a 50-50 chance of receiving $215.