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Financial Planning > Behavioral Finance

How to Prepare for Clients’ Cognitive Decline

By Emily Zulz

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Financial decision-making is one of the first skills to deteriorate as people age and their cognitive abilities naturally decline, according to a new paper from State Street Global Advisors.

The paper, “The Impact of Aging on Financial Decisions,” emphasizes the need for advisors and investors to put a plan in place for their clients’ potential cognitive decline.

“As our population continues to age, cognitive decline is set to become one of the most challenging intergenerational issues facing the investment industry,” the paper states. “Since the financial crisis, the focus of financial advice has been squarely on saving for retirement; little attention has been paid to how cognitive decline could impact investors and their families.”

When SSGA talks about cognitive decline, it’s referring to three types: mild cognitive decline (“minor lapses in short-term memory or the need for an extended period of time to process information”), dementia (“when an individual’s cognitive decline actually interferes with their daily life”) and Alzheimer’s disease (“the most progressive and debilitating form of cognitive decline”).

According to the The Alzheimer’s Association, mild cognitive impairment occurs in roughly 10% to 25% of people in the U.S. who are 65 and older. Some people may only experience mild cognitive impairment; for others, this condition is a precursor to dementia.

With an aging U.S. population – according to the U.S. Census Bureau, there are 45 million people 65 and older (representing 14% of the population) and that’s estimated to grow to 66 million within 10 years – one can see why cognitive decline could be a serious concern.

And yet, SSGA finds, it’s not being discussed or planned for by many investors and advisors.

SSGA’s research finds that among individual investors there is an overall lack of concern and planning.

According to a survey of 400 financial advisors and 560 individual investors, only about 39% of investors reported that they believed they had a suitable plan for if and when their decision-making becomes diminished.

In another survey of 912 adults who are responsible for investment decision-making of a portfolio of $200,000 or more, SSGA finds that investors have had some planning conversations with family members – but few with their advisor.

When it comes to planning for cognitive decline, the survey finds that 32% have discussed this with a family member, but only 17% have done so with a financial professional. The survey found similar results for “planning for dementia/Alzheimer’s,” with 26% having discussed this with a family member and 19% with a financial professional. To compare, 54% of those surveyed have discussed planning for retirement with a family member and 42% have done so with a financial professional.

In an interview with ThinkAdvisor, Brie Williams, head of practice management at SSGA, said advisors and investors should not be waiting to start the conversation until they notice “more overt signs of cognitive decline.”

Rather, advisors and investors should address the risks of cognitive decline before any symptoms appear.

“Because if you walk into a financial advisors office and say ‘Can you put me on the account?’ Let’s say it’s the daughter of the father, and if the father was just moved into the Alzheimer ward,” Williams told ThinkAdvisor. “If there hadn’t been any prior communication before that action took place, that’s a point where it’s very complicated to make that type of transition possible. Where if there were conversations held earlier and proper steps put in place, that would have been a much smoother request to accommodate and it probably would have been an action plan already underway before the dad went into specialized care.”

In its paper, SSGA points to a Brookings report that says that financial decision-making peaks for most people in their early to mid-50s, and investing skills can start to decline sharply in one’s 60s and 70s.

Because of this, SSGA believes the ideal time to develop a plan is when clients are in their early-to-mid 50s.

 “Addressing the risks of cognitive decline early on and before the onset of any symptoms enables the advisor to neutralize what could have become a sensitive topic that’s difficult to discuss,” the paper states. “From the client’s perspective, the advisor is providing an important additional level of risk management.”

Williams said advisors should be developing a holistic financial plan that includes the potential for cognitive decline.

“Investing is about managing uncertainty, so every decision we make is in light of what we know about the past and about the present and what we think is likely to happen in the future. To cope with that uncertainty, we look to maximize what our expected returns might be with an acceptable level of risk,” she told ThinkAdvisor. “But what we’re not seeing is the exception here, when it comes to the potential for cognitive decline. Here, the future is entirely unknowable, and yet despite this uncertainty, we’re not managing or hedging our bets.”

The paper has a few tips to help advisors include a plan for cognitive decline as a part of their overall advice.

Each advisor and each firm should develop their own approach that can be tailored to the client’s specific situation, SSGA says. They should also decide what kind of standard documents, such as durable power of attorney, and firm-specific documents, such as a diminished capacity letter, are included in this process.

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