Cognitive, Physical Decline Increase Financial Risk for Older Adults

There is one type of risk financial professionals have left largely unaddressed, according to a Retirement Income Institute note published in September.

“The Risks That Financial Professionals Are Not Pricing into Client Portfolios” found that as chronic illness, cognitive decline and unanticipated heath events become more likely within an aging client population, they introduce a layer of volatility that is “rarely fully captured in financial plans.”

That volatility “reveals itself in declining levels of savings, impaired decisionmaking, greater susceptibility to fraud and sudden losses in adviser assets under management,” according to the paper. Telltale signs can alert advisers to take action for their own well-being and that of their clients.

Advising the Most Vulnerable

“The typical client is already well into their 60s,” explains Chris Heye, author of the paper and the CEO and founder of Whealthcare Solutions Inc. and Whealthcare Planning LLC. “The peak age of financial decisionmaking [for the average person] is 53.”

By age 65, approximately 80% of adults have at least one chronic illness, and more than half live with two or more, according to the paper. Based on that average, when a firm has a client base with a median age of 65, 77.8% of its revenues are controlled by clients with at least one chronic illness, and 52.6% of revenues are controlled by clients with two or more illnesses.

On the same age-weighted scale, 14.1% of revenue is controlled by clients with Alzheimer’s disease, another type of dementia or mild cognitive impairment. For clients at least 65 years old, 22.8% of their revenue is controlled by people with any of the three conditions.

In addition, the likelihood of cognitive impairment increases with age, accelerating rapidly by the time a person reaches their mid-70s, according to RII. For a firm with a client base with a median age of 75, almost one-third of its assets are held by clients suffering from cognitive impairment. This figure rises to 36.7% for the firm’s clients older than age 65.

Advising clients who are past their decisionmaking prime can pose a threat to an adviser’s AUM, says Heye. He explains that a saver’s money can permanently “disappear” from their account due to having very high health expenditures, being unable to work, succumbing to a scam or making other poor financial decisions.

The report summarized the health-related risks for a typical advisory firm’s clients with a median age of 65 to 75:

• More than 50% of clients believe that health events and costs constitute the No. 1 risk to their financial and retirement security;
• Between 77.8% and 87.2% of all AUM are held by clients suffering from at least one chronic illness;
• Between 52.6% and 67.6% of all AUM are held by clients suffering from at least two chronic illnesses;
• Between 14.1% and 32.2% of all AUM are held by clients suffering from cognitive impairment; and
• Between 22.8% and 36.7% of all AUM held by clients over age 65 are controlled by individuals suffering from cognitive impairment.

Heightened Duties

Dawn Carpenter, the Milken Institute’s director of financial longevity, says advisers face heightened duties to protect vulnerable clients. If they overlook red flags, even unintentional missteps can expose them to regulatory action or liability.

“This is not just a technical issue,” Carpenter wrote in an email. “It’s a systemic challenge to the integrity of the financial advisory profession in an aging society.”

Carpenter added that there are also operational and compliance risks: A client’s declining decisonmaking capacity can lead to unsuitable transactions or failure to follow proper procedures. The Financial Industry Regulatory Authority and the Securities and Exchange Commission expect firms to anticipate these issues, she said.

Jason Key, TIAA’s managing director and head of consultant relations, previously told PLANADVISER that although there is no fiduciary duty that directly correlates to cognitive decline, “it has to be considered.”

He says there are some regulatory tools that financial firms can refer to, such as FINRA Rule 2165, which allows broker/dealers to place a temporary hold on the release of funds or securities from a participant’s account when there is reasonable belief that they are being exploited.

In addition, he says FINRA Rule 4512(a) requires broker/dealers to make a reasonable effort for each of their non-institutional customer accounts to obtain a name and contact information of a trusted contact person.

“I think those two tools are a good example of things that advisers and plan sponsors can do to make sure that we’re protecting participants that experience cognitive decline,” Key says.

Crucial Conversations

Heye says data show the importance of advisers addressing financial risks stemming from health issues. He suggests helping clients set up estate documents, health care proxy and power of attorney. Heye also recommends asking clients to be frank about their own health and that of their family members.

“If I were a financial adviser, I’d say, ‘Look, it’s my job to protect you as a fiduciary,’” says Heye. “Protect your clients from all financial risks, not just financial risks posed by the stock market.”

Health and longevity-related subjects can be “much bigger threats” to a client’s finances than economic conditions, according to Heye, even though they may be difficult for clients to discuss.

“Don’t delay the inevitable; have these conversations,” Heye says. “This is the stuff that really matters to clients.”