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With up to 25% of assets exposed, Schwab, Fidelity and Vanguard add algorithms to spot decreased mental capacity among aging clients, but RIAs are sitting ducks, a new report states

The leading edge of the boomer generation is now 75, near the average for Alzheimer's onset, and up to 25% will suffer diminished capacity, making them vulnerable to poor decision-making or exploitation

Saturday, June 12, 2021 – 12:25 AM by Oisin Breen
no description available
David Laibson says investors could "steer the horse over the cliff."

Vanguard Group, Fidelity Investments and Charles Schwab have already added automated triggers to detect tell-tale signs of reduced mental capacity among investors, but many RIAs [registered investment advisors] could be caught flatfooted, according to a new study. See: What exactly is an RIA? 

Chris Heye
Chris Heye: 'Twenty-five percent plus of adults over 65 have dementia or mild cognitive impairment.'

Indeed, if RIAs knew an imminent market correction would wipe out 25% of their client assets, they'd act, but few are prepared for dementia, says Chris Heye, founder and CEO of Whealthcare Solutions, which just published a white paper on the looming crisis.

As the US population ages over the next decade, the concentration of wealth in the hands of older adults is likely to accelerate, presenting both challenges and opportunities for the financial services industry, according to the Whealthcare report. 

Trillions of dollars will be transferred to heirs over the next 20 years, presenting RIAs with significant opportunities for asset accumulation and consolidation. 

But RIAs are unprepared for the downside.

"[Some] 25%-plus of adults over 65 have dementia or mild cognitive impairment, which implies that 25% of a typical advisor’s assets are at risk. But I don’t sense that advisors are responding in the same way they react to other risks that threaten 25% of their AUM [like] a market correction," Heye explains, via email.


Baby boomers make up one of the wealthiest and healthiest generations in U.S. history and are living longer, increasing their susceptibility to old age maladies. Acting in their best interest will take the demands of fulfilling fiduciary care to its zenith, according to Whealthcare.

Afflicted investors may "hold on to the reins ever more tightly and steer the horse over the cliff," David Laibson, a Harvard economics professor told The Wall Street Journal (WSJ). 

While a horse, literally, cannot be steered over a cliff, Laibson's metaphor makes the point. Investors with diminished mental capacity are prone to bad decision-making, or worse, exploitation, according to the white paper.  

All told, if one in four adults over 65 suffer from a form of dementia, as a 2018 report from the Alzheimer's Association states, an asset base of some $6.25 trillion faces bedeviling uncertainty during its drawdown.

The up-shot is that brokerages or RIAs can do more than stave off risk; they can actually profit, Heye says.

"More effectively serving and protecting older adults helps advisors acquire held away assets and keep assets when the client passes away. It’s a win-win," he adds.

Trusted contacts

The big firms have already begun to take steps to address the crisis.

Michael Kitces
Michael Kitces: 'The biggest advisor challenge is simply the dynamic of trying to communicate.'

A wary Vanguard has tripled to 14 the number of staff assigned to its investor protection group. Fidelity uses payments tracker EverSafe to monitor potential cognitive decline, the WSJ reports.

Schwab uses algorithms to spot such things as frequent password resets and the use of words like "confused" to identify accounts in need of monitoring. 

That said, many advisors are not even doing the minimum to protect themselves or their clients. 

 A 2018 FINRA  rule states investors must provide a "trusted contact" on their account.  Yet, only one in four clients has provided a name that can help address suspected fraud, among other issues, FINRA reports.

FINRA rule 2165 allows brokerage firms to suspend disbursements if they detect financial exploitation.

The hard macro numbers tell the extent of the problem.  Boomers hold a whopping 50% of domestic household financial assets, or roughly $25 trillion, according to data from Boston consultancy Cerulli Associates.

Boomers are currently 57- to 75-years-old and account for one in five US citizens. The average age of dementia onset is about 83 but -- never mind early onset -- the disease begins to claim victims as early as 65.

No silver bullet

After seeing dementia ravage his own family, Heye helped design a clinical study at Massachusetts General Hospital that delved into the cognitive underpinnings of sound financial decision-making.

He founded Whealthcare after receiving his PhD from the Massachusetts Institute of Technology. He's also holds a CFP certification. 

His firm offers software to help advisors with health care issues, and such issues as trusted contacts and power of attorney.

Still, the challenge has no silver bullets.

"The biggest advisor challenge is simply the dynamic of trying to communicate with clients who can’t remember basic, yet important, details about their own lives and financial situations," writes Michael Kitces, in his financial services blog "Nerd's Eye View." 

"By keeping conversations straightforward and clear, and maintaining patience and compassion during these conversations, client interactions can often remain productive and helpful."

Documenting actions and involving trusted third parties is also good practices, he adds. 

Barrier to action

The white paper stops short of setting out the exact chain of events from a client's diagnosis to their assets migrating away.  But it outlines a clients' vulnerability to fraud, the loss of heirs as prospective clients, potential regulatory issues and reputational risk.

The Whealthcare paper acknowledges that some advisors have begun to act to address the problem.

The problem isn't just retention, given that 87% of heirs fire their parents' financial advisor, according to Cerulli data.

The high cost of adding increased service and new technology to support clients suffering from dementia remains a significant barrier to action.

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Jeff McGuire

Jeff McGuire

June 12, 2021 — 11:39 PM


June 13, 2021 — 6:57 PM
Did you think of definition for ria in the article?


June 13, 2021 — 7:32 PM
Pat, Good call. Added a link and spelled out the acronym.

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