Steps you can take to manage the risk due to cognitive decline

Cognitive decline is a topic most people would rather not think about, and that’s the danger when it comes to preparing for this risk.

Diminished mental capacity can lead to a devastating loss of savings built up over a lifetime due to poor bad decisions, unfortunate misjudgement or financial exploitation.

With the large baby-boom generation growing older, it’s a subject that’s starting to gain more attention. Indeed, a recent article in the Wall Street Journal called cognitive decline the biggest financial risk facing baby boomers.

The Canadian Securities Administrators (CSA), the umbrella group for the country’s securities regulators, has published new rules for registered investment firms and advisors to enhance protection for older and other vulnerable clients.

The following rules will come into force at the beginning of next year:

• Trusted contact person—Registrants (firms and advisors including PWL Capital) will be required to take reasonable steps to obtain the name and contact information of a trusted person from clients as well as their written consent for the trusted person to be contacted when there are concerns about financial exploitation or the client’s mental capacity to make financial decisions.
• Temporary holds—A regulatory framework is introduced to guide registrants in placing a temporary hold on transactions, withdrawals or transfers in circumstances where they have a reasonable belief that there is financial exploitation of a vulnerable client, or where there are concerns about a client’s mental capacity to make financial decisions.

The stakes are high for seniors and their families. Canadians who are 65 or older now represent nearly 17% of the population. They control $541 billion in non-pension financial assets, representing 39% of such assets controlled by Canadian households, according to Statistics Canada data cited by the CSA.

The Wall Street Journal article reports that rates of mild cognitive decline and dementia increase from a combined 12% for ages 70 to 74 to 45% for those 80 to 84, according to a report by the Center for Retirement Research at Boston College.

Mental capacity can diminish gradually and may not immediately affect a person’s ability to perform routine financial tasks such as paying bills. However, it can make complex or unfamiliar decisions even more difficult, including buying and selling investments, calculating asset allocations and efficiently managing withdrawals from registered and taxable accounts.

Do-it-yourself investors are of particular concern. The use of discount brokers has rocketed during the pandemic and DIY investors typically have little or no contact with an investment advisor.

The WSJ article notes: “Do-it-yourself boomers may be more vulnerable in some ways because they’re calling the shots solo, without help from wealth advisers. So, if they go off the rails, no one else may know. ‘That’s the danger with do-it-yourself investors—they may be overconfident,’ says Michael Finke, a professor of wealth management at the American College of Financial Services.”

At PWL, we believe it’s important to have a long-term plan to mitigate the risk exposure due to the possibility of cognitive decline. In putting your plan together, you should involve your loved ones and professional advisors, so they understand where your assets are located and your wishes for their management.

Here are some steps you should consider when planning in the event of diminished mental capacity.

• Simplify your finances before possible cognitive decline begins. This may include reducing the number of accounts you have, selecting simpler investments and transferring investments from DIY accounts to advised accounts.
• Identify a trusted advocate and an alternate who understand your financial objectives and will act as your trusted contact person. These may be family members, close friends or outside professionals, such as accountants or lawyers. However, it should never be the investment advisor who is managing your investments.
• Regularly review and update any general or limited powers of attorney you currently have and get an enduring power of attorney (or mandate of protection in Quebec) that will be used if you lose the capacity to manage your affairs.
• Collect either in a binder or an internet vault a list of financial goals and all your financial account numbers and passwords as well as a list of regular monthly bills and any other important information and records.

For more information on this subject, please listen to our discussion in episode 22 of our Capital Topics podcast.

We are sensitive to the concerns people have about cognitive decline and the many issues it raises. Please contact us if you wish to discuss how we can help you prepare yourself or your loved ones for this unfortunate possibility.