Elderly investors have the most to lose — literally, in terms of assets — if they start losing cognitive abilities.
This means both a big responsibility and an opportunity for financial advisors, said David Laibson, a professor of economics at Harvard University.
Investors 65 years of age and older control $10 trillion in financial assets and another $8 trillion in real estate, Laibson told attendees at the annual Morningstar Investment Conference Friday.
"About half the population in their 80s suffers from significant cognitive impairment, effectively rendering them incapable of making important financial decisions," he said. "Nevertheless, our existing fiduciary protections are far greater for 50-year-olds than 90-year-olds."
There are legal and financial tools the elderly can use to protect themselves, Laibson said, but there is also "enormous psychological resistance" to using them.
The elderly may not recognize a decline in their powers of memory or thought, may be over-optimistic about staying healthy or may simply feel a need for personal control.
Or they may, like others, simply procrastinate or have an aversion to making decisions about complex but important products such as living revocable trusts or annuities.
Laibson suggests that advisors have all clients at age 65 sign a living revocable trust, a living will and a health care proxy, which gives someone else the authority to make decisions for them when they can no longer do so themselves.
By making the signing of those documents a default for everyone at age 65, advisors avoid having to nudge a particular client to sign later if he appears to be suffering from dementia, Laibson said.
Advisors should conduct regular financial checkups, where they review the designation of a trustee or trustees and of beneficiaries, to see if anything needs to be updated or changed, Laibson said.
At the conclusion of each checkup, a time and date should be set for the next one.
Laibson favors involving a client's family, since the children or other relatives may be making key decisions later. If there is resistance, family involvement is not required, he said.
A fail-safe system is best, but may need to allow for some client control, he said. For example, an advisor could segregate a client's investments so that the client can invest a portion of his assets while the rest remains safely overseen by the advisor.
Or the advisor may let the client choose from five mutual fund investments that the advisor has already vetted, he said.
Asset managers can help by designing products that allow people to feel like they are in control even though they are "in a very safe sandbox," he said.
There is a big need for "safe harbor" financial products to help protect those who develop cognitive issues, such as low-fee funds with an automatic monthly drawdown mechanism after age 70 or low-fee annuities.
Some regulatory changes could help, Laibson said. Among them: a requirement that everyone assign a durable or springing power of attorney at age 65 and establishing a fiduciary duty for individual retirement account advisors and asset management companies.
