By Joel Dresang

In Shakespeare’s “King Lear,” the title character decides to abdicate and divide his kingdom among his three daughters before he loses his reasoning. The tragedy is he’s too late.

Researchers have found that many investors also fear mishandling their wealth amid the cognitive deterioration that accompanies old age. And while a seemingly easy solution is to designate someone you trust to take control for you before you lose it, like Lear, the tricky point is timing.

A study published by the American Economic Association reported that the vast majority of individuals 55 and older have someone reliable to take over their finances, should they need help. However, they have little faith they would get the timing right on when to surrender control.

On average, survey respondents said there’s a 24% chance they’d cede their financial powers too soon — while they’re still capable. They saw a 35% chance they’d hand over control too late — after they’ve already declined and made decisions that marred their wealth.

“The transfer of financial control should occur before people make irreversible mistakes,” the researchers noted.  “Many factors make it challenging to transfer control at the right time, including the elusiveness of cognitive decline.”

Legal authorizations, such as financial power of attorney, can help protect wealth from incapacity. But it’s harder to save someone’s hard-earned assets from their own mental decline. A study by the FINRA Investor Education Foundation found that older adults who misperceived the quality of their memory were more likely to make financial mistakes.

“Nobody thinks they’re slipping, usually,” Dave Sandstrom says, “until it’s too late.”

As he has met with clients over the years, Dave occasionally observes suspicious behaviors: Uncommon forgetfulness, uncharacteristic mood swings, extraordinary financial activity.

“It’s a tough conversation to bring up to somebody,” Dave says. “You don’t want to say, ‘Hey, you’re not what you used to be.’”

Warning signs of diminished financial capacity

  • Trouble paying bills
  • Difficulty doing simple math
  • Depleted savings accounts
  • Falling victim to scams
  • Disorganized checkbook
  • Unexplained purchases
  • Serious credit difficulties
  • Inappropriate investments

National Endowment for Financial Education; University of Alabama at Birmingham

Dave takes a subtler approach, asking questions, comparing clients’ behavior with what he knows about them from past experience. Dave says it helps when clients designate trusted contacts — people who can help Dave check on a client’s welfare, on whether the client may be harming themselves or someone may be taking advantage of them.

“Adding that trusted contact is part of that acceptance of help,” Dave says.

Being open to help is key, according to another study. Research published by the International Labor Institute found that the individuals most likely to lose their wealth to cognitive decline are those who have tried to be more independent — do-it-yourselfers who are more secretive about their finances.

“The largest deviations from efficient portfolio strategies occur among those who appear to overestimate their capabilities and do not seek external help with their investments,” economists reported.

Dave says that rings true with his experience.

“I can give you a laundry list of the nightmares from when people weren’t paying attention and didn’t have some support, some help, making really bad decisions,” Dave says.

Dave’s father-in-law, now 92, had a successful career as an accountant.

“He’s still sharp, but he was always very private about his stuff,” Dave says. “He’s got five kids but never talked to them about it. And then finally about five years ago, he got his oldest son involved with everything. He just laid it all out and took him to his financial advisor so he could know the whole thing, in and out.

“And I’ll tell you what,” Dave continues, “you could tell that it took a load off my father-in-law’s plate.”

Dave’s mother-in-law succumbed to Alzheimer’s disease about five years ago. Dave thinks that experience helped his father-in-law open up to his son.

Economists writing about financial decision making and cognitive decline raise concerns about the increased complexity of choices for older investors even as people live longer and their wealth accumulates. Likewise, federal agencies have been warning investors as well as their loved ones about guarding against financial missteps from diminished mental capacity.

Some of their suggestions:

  • For investors
    • Establish a trusted contact. Ask your advisor how to make the arrangement and discuss under what circumstances the advisor would reach out to the contact. Landaas & Company suggests the contacts not be someone already authorized to transact business in the client’s account. Otherwise, they might have a conflict of interest when exploitation is suspected.
    • Get your estate in order. Once you’ve set up what you want done with your assets and who’s in charge when you’re no longer able to make financial decisions for yourself, inform your advisor and trusted contact so they can help carry out your wishes.
  • For trusted contacts
    • Keep in touch with the person. Check in regularly. Note any concerns you have about behavior or thought processing that seems out of the ordinary and could impact financial decisions. Be alert to evidence of scams.
    • Establish contact with the investment advisor. Familiarity can help ease stressful situations. Get to know the advisor in advance of possible communications about emergencies. Know that you both have the investor’s well-being in common.

Investors benefit from connecting their personal support network to advisors ahead of situations that warrant outside assistance.

“I don’t think it’s ever too early for somebody to introduce you to adult children or somebody that they really trust,” Dave Sandstrom says. Besides children, younger siblings, nieces, nephews and reliable friends can help advisors as emergency financial contacts.

Other Money Talk articles from Joel Dresang

The main objective, Dave says, is acknowledging the inevitable need for support and establishing with an advisor a point person to reach when the advisor has concerns.

“People who don’t have trusted contacts and think they can do everything on their own,” Dave says, “they’re the hardest to protect.”

Joel Dresang is vice president-communications at Landaas & Company.

Learn more
Trusted contacts for your sake
Choosing a trusted contact person can help you protect your money, from the Consumer Finance Protection Bureau
Advancing age, declining capacity, by Joel Dresang
Estate Planning: Power of Attorney, Financial Industry Regulatory Authority
Planning for Diminished Capacity and Illness, Securities and Exchange Commission
Keeping family in the financial loopa Money Talk Video with Isabelle Wiemero
(initially posted Aug. 31, 2023)

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