Studies Show Cognitive Ability For Decision Making Declines Across The Board As We Age; This Means Increased Challenges For You As An Advisor To Older Clients

Monday, July 30, 2012 07:19
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Studies Show Cognitive Ability For Decision Making Declines Across The Board As We Age; This Means Increased Challenges For You As An Advisor To Older Clients

Tags: client communications | client service | practice management | risk

Scientific evidence is indicating that everyone suffers from impaired cognitive ability as they age, not just those suffering from Alzheimer’s or a stroke. It is natural and inevitable and does not seem to be affected by education or intelligence. It also is not apparently slowed by brain exercises or learning to speak Russian. So how do we make wise investment decisions as we age?

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The late 50s are when the ability to perform tasks that require processing based on some type of knowledge and experience tend to peak. Other tasks requiring speed, reasoning, and memory peak in the 20s. Einstein was age 26 when he experienced his so-called magic year.
 
The process of making wealth management decisions is similar, requiring the ability to respond to a stimulus within a particular context and drawing upon a base of knowledge. Recent studies conducted by a senior economist at the Federal Reserve along with other academics show, accordingly, that people make their best wealth management decisions in their mid-50s.
 
After age 60, the ability declines by approximately 2% per year. The findings also showed that ability at age 90 is about half of ability at age 65. They also showed a gradual overall decline instead of a smaller number of more seriously impaired people affecting the average.
 
Despite this, confidence that we can make sound decisions increases as we age. People in their 80s had greater confidence in their financial cognitive ability than people in their 60s.
 
These facts present a challenge for financial advisors who have older clients making questionable wealth management decisions. It presents a fiduciary balancing act because of privacy laws and the obligation to do what’s in the best interests of the client.
 
This is why appropriate planning utilizing tools such as powers of attorney, trusts, and advanced medical directives are imperative. And as far as protecting yourself while you try to protect your client, all you need is a waiver to be able to contact a client’s family or attorney and alert them to possible diminished cognitive ability of the client.
 
Advisors can perform an invaluable role in this regard. However, care must be taken to also protect the family against relatives wishing to have someone declared incompetent so the relatives can gain control over the wealth.
 
As the population continues to age—the largest population in history—it’s a good idea to check with legal resources to see how you can best balance protection for yourself while you fulfill your fiduciary duty for your aging clients.

 

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