Deciding to “cross that bridge when I come to it” may leave SMSF investors with less-desirable options and outcomes, and their families and advisers with more stress and risk.
Age has a way of sneaking up on all of us, including clients. Life experiences make us wiser, but unfortunately they don’t protect us from the natural level of cognitive capabilities that comes with age – and it makes financial decision-making more difficult as we get older.
Conversations about ageing focus on retirement income planning, but what’s often overlooked is plan development to manage the financial risks associated with a change in an individual’s financial capacity – the ability to manage their money to meet their needs and match their values.
All investors need a contingency plan as part of their comprehensive wealth management strategy. The estate and longevity aspect of the financial life plan should include structural components – not just funding – to help mitigate the risk of a breakdown on the living well and living long journey.
Age and intelligence – Some facts to consider
Ageing is not only skin deep; it has profound effects on our brains.
Researchers have a growing understanding of how physiology and the passage of time affect the brain and financial decision-making. As primary actors in SMSFs’ retirement journey, industry providers and advisers can draw on those insights to develop strategies that help improve people’s ability to meet their needs late in life.
Cognitive ability and longevity go hand-in-hand. And while many people continue to handle their finances with ease well into their later years, even people with healthy brains tend to experience changes to their cognitive abilities.
Case in point: ageing heightens the likelihood of cognitive impairment. Two-thirds of individuals aged 60 and over, with no dementia, experience some cognitive decline over a four-year period, according to the Center for Retirement Research at Boston College and the Rush University Memory and Aging Project. In this situation, while the ability to make sound financial decisions erodes, confidence levels increase; a dangerous combination.
Have you ever considered what may happen if an SMSF client you’re servicing was no longer able to make clear choices about their investment portfolios? Investors who aren’t prepared for this possibility are vulnerable to real threats, including family conflicts, expensive legal action and devastating financial fraud.
“That won’t happen to me,” you hear your clients say, or “I’ll address it when I see the first signs of decline.”
Unfortunately, I hear these excuses far too often. In fact, 61 per cent of investors happily live the unexamined life, with only 39 per cent possessing a suitable plan should their financial decision-making abilities become diminished, according to a State Street Global Advisors survey, “Money in Motion”, from 2015.
The truth is, with our longevity set to increase, cases of cognitive decline and dementia will become increasingly prevalent among senior investors. SMSF investors are not immune. In fact, SMSF investors present as particularly difficult cases.
Empowering clients – addressing the possibility of cognitive decline
For most investors, there is psychological resistance to planning for the possibility of cognitive decline, triggered by personal and potentially deep-seated issues such as an aversion to counterparty risk. SMSF investors are no different – they like to be in control and they’re used to leading a productive and independent life. Giving up independence or even accepting help is especially difficult for them to comprehend. This is often the biggest hurdle for clients to develop a plan or even seek advice.
Age is nothing more than a number. It doesn’t define our abilities and it shouldn’t define our relationships or our opportunities. However, the responsibility we have is to empower clients with the information they need. Addressing the financial risks associated with cognitive decline early on and before the onset of any symptoms enables you and your clients to neutralise what could be a sensitive topic that will be difficult to discuss in the future.
Here are some considerations to help SMSF investors take a risk-managed approach:
• Help clients understand that ageing doesn’t equal doom. This is about empowerment, taking control to guard against what could happen tomorrow, and doing it when they are most able to do so.
• Trust requires empathy. Inclusion and communication are also important. Even the most difficult topics can become less stressful with open and respectful dialogue.
• Start early. Frame the conversations more broadly about how to help clients safeguard the financial future for themselves in the event of being incapacitated in any way. Incorporate contingency plan development as an important part of the financial plan to neutralise sensitivities.
• Investors should continue to learn. Despite changes to cognitive skills as we age, the silver lining is the fact individuals can take steps throughout their lifetime to improve their knowledge. What you know is more important than how fast your brain works.
• Watch for warning signs of fraud and abuse. Although the statistics vary due to considerable under-reporting, financial abuse and fraud are on the rise as Australia’s ageing population lends itself to a growing number of investors with diminished capacity. Familiarise yourself with protocol for monitoring situations of potential concern, such as fraud and abuse.
Ageing can be scary, but the antidote to fear is knowledge. Investors can’t predict the markets, but they can determine how their financial interests will be protected if their own decision-making abilities start to decline.