Cognitive decline and money: Your kids may not be your best protectors

Over recent months I have been discussing the issue of cognitive biases – the little mental traps we subconsciously create for ourselves which often prevent us from making good decisions.

This is a very important area of contemporary study and I am quite passionate about it. Recently I met with a fellow devotee Kajanga Kulatunga (KJ). He is the founder of the Centre for Investor Behaviour, a non-profit, US-based research platform, and kindly hared with me some of the extensive research work he has undertaken in this area. It just reinforces the importance of understanding why, as investors, we behave as we do and why we continue to make the same fundamental mistakes when managing our money.

One area on which he has been focused is the area of cognitive decline. In addition to the normal cognitive biases with which we are burdened over our lifetimes, we also need to understand that our ability to make decisions declines and deteriorates as we get older.

Cognitive decline and retirement

Our ability to perform analytic tasks begins to wane as we leave childhood and falls faster in our 50s onwards. A major problem for all Australians is that we have to perform some of the hardest financial analysis at precisely this age – what does retirement look like and how do I manage my drawdowns? That isn’t all. As we become the first generation in humanity living through multiple generations at the same time, we have to deal with the onset of mild cognitive impairment (MCI) dementia and Alzheimer’s.

This process of cognitive decline affects individuals at different times and at different rates but ultimately it will be encountered by us all. The problem is the individual may not necessarily notice its onset. It is crucial to watch out for the signs and accept the inevitability of the process. Close family members and friends should watch for signs like memory loss, unusual behaviour vagueness and son on and seek the help of a GP or specialist to identify and manage any issues.

This problem reinforces the need for a trusted independent source of information and care. This is vital to make sure everyone – including your children – are fairly dealt with at arm’s length with your best interest at heart.  Unfortunately, the process of cognitive decline makes us more vulnerable and opens us up to the possibility of exploitation. It is a sad fact that the majority of this abuse is perpetrated by family members.

It is crucial that you have strong independent advice from your doctor but also from an accountant and/or financial advisor who is focused on your interests and help can manage your financial affairs as you age to ensure that the interests of you and your partner (if any) are given the first priority.

Identifying cognitive decline

In my experience with giving advice for over 30 years, I noticed many signs of this decline in my clients over time. These include memory loss, difficulty in making decisions or changes, inability to understand or comprehend advice or just a reduction in level of interest in their affairs.

I also experienced and managed the problems that can arise within families as the older generation declines both physically and mentally. With a couple, where one remains mentally agile, the problem is less acute, however, when both (or the survivor) are suffering mental decline many serious problems can emerge with adult children. The issues which need to be confronted include:

• Who decides when care and support is needed either “in-home” or in residential aged care?
• Who decides how to manage finances?
• Who decides how to manage health?
• Who is in control of estate planning?

The majority of people are comfortable to rely on children to manage these issues and may appoint one or more children as powers of attorney. However, I strongly believe that having additional independent advice can be extremely important, particularly when there are several children and only one or two are given these extensive powers. There are numerous examples of elder abuse in Australia through the abuse of powers of attorney. It is a sad fact that unhindered access to money can be overwhelmingly tempting for many people. Oh, the stories I could tell you!

Also, many people are not aware that when they lose mental capacity they can no longer be in roles such as trustee (of a family trust or self-managed superannuation fund) a director of a company, an executor or power of attorney. If this outcome is not planned for, there can be unintended and sometimes terrible consequences.

Protecting your money in the case of cognitive decline

I have advised many clients in the past to appoint an independent advisor (or family friend) to assist children in making financial decisions about their parents’ money but leave the health-related decisions to children. This not only helps reduce the possibility of abuse and exploitation but also significantly reduces the pressure on those children who are appointed to these important roles. It is crucial not to underestimate how mismanagement of this process can very quickly split families apart and cause permanent damage. A good advisor will have a depth of understanding about the broader family dynamic and internal relationships so they can assist their clients in managing this difficult process.

Certainly, in my experience, I have recommended to many clients to see their GP once I have noticed the signs of cognitive decline. Typically, I would also then recommend that my clients have one of their children or other family member or friend attend meetings to ensure that there is a clear understanding of what is going on.

Any decent independent advisor will effectively engage with the family to ensure there are proper processes put in place to manage cognitive decline and ensure that people’s best interests are served over the whole of their lifetime. Accordingly, a good advisor is absolutely crucial in helping manage the inevitability of cognitive decline over time and is a highly valuable service for the community.