With up to 25% of assets on display, Schwab, Fidelity and Vanguard add algorithms to detect diminished mental capacity in aging clients, but RIAs are sitting ducks, new report finds

The vanguard of the baby boomer generation is now 75 years old, near the average for the onset of Alzheimer’s disease, and up to 25% will suffer from reduced ability, which will make them vulnerable to poor decision-making or exploitation

Vanguard Group, Fidelity Investments and Charles Schwab have already added automated triggers to detect tell-tale signs of reduced mental capacity in investors, but many RIAs could be caught off guard, a new study finds.

Chris Heye: “Over 25% of adults over 65 have dementia or mild cognitive impairment.

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

As America’s population ages over the next decade, the concentration of wealth in the hands of the elderly is expected to accelerate, presenting both challenges and opportunities for the financial services industry, according to the Whealthcare report.

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

But the RIAs are not prepared for the downside.

“[Some] More than 25% of adults over 65 have dementia or mild cognitive impairment, implying that 25% of a typical counselor’s assets are at risk. But I don’t get the impression that advisors react the same way they react to other risks that threaten 25% of their assets under management. [like] a market correction, ”Heye explains via email.


Baby boomers are one of the wealthiest and healthiest generations in American history and increasingly face the challenges of old age. Acting in their best interests will bring the demands of fiduciary care satisfaction to its zenith, according to Whealthcare.

Distressed investors can “hold the reins more and more firmly and point the horse towards the cliff,” said David Laibson, professor of economics at Harvard at the Wall Street Journal (WSJ).

While a horse, literally, cannot be driven over a cliff, Laibson’s metaphor takes stock. Investors with reduced mental capacities are prone to bad decisions, or worse, exploitation, according to the white paper.

All told, if one in four adults over the age of 65 suffers from some form of dementia, as a 2018 Alzheimer’s Association report indicates, an asset base of some $ 6.25 trillion is faced with unsettling uncertainty when withdrawing.

The result is that brokerage houses or RIAs can do more than prevent risk; they can actually benefit from it, says Heye.

“Serving and protecting seniors more effectively helps counselors acquire owned assets and keep them when the client dies. It’s a win-win, ”he adds.

Large companies have already started to take measures to deal with the crisis.

Michael kitces
Michael Kitces: “The biggest challenge for counselors is just the dynamics of trying to communicate. “

A suspicious Vanguard has tripled the number of employees assigned to its investor protection group to 14. Fidelity uses EverSafe Payment Tracking to monitor potential cognitive decline, reports the WSJ.

Schwab uses algorithms to spot things like frequent password resets and the use of words like “confused” to identify accounts needing monitoring.

That said, many brokers don’t even do the minimum to protect themselves or their clients.

A 2018 FINRA rule states that investors must provide a “trusted contact” on their account. Yet only one in four customers have provided a name that can help resolve cases of suspected fraud, among other issues, reports FINRA.

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

Hard macro numbers indicate the extent of the problem. Baby boomers hold 50% of the financial assets of national households, or about $ 25 trillion, according to data from Boston consulting firm Cerulli Associates.

Baby boomers are currently aged 57 to 75 and Account for one in five U.S. citizens. The average age of onset of dementia is around 83, but – regardless of early onset – the disease begins to take its toll as early as 65.

No quick fix

After watching dementia ravage her own family, Heye helped design a clinical study at Massachusetts General Hospital that explored the cognitive foundations of sound financial decision making.

He founded Whealthcare after obtaining his doctorate from the Massachusetts Institute of Technology. He also holds a CFP certification.

His firm offers software to help counselors resolve health issues, including trusted contacts and powers of attorney.

Yet the challenge has no quick fixes.

“The biggest challenge for counselors is simply the dynamics of trying to communicate with clients who don’t remember basic, but important, details about their own life and financial situation.” writes Michael Kitces, in his financial services blog “Nerd’s Eye View”.

“By keeping conversations simple and clear, and maintaining patience and compassion during those conversations, interactions with customers can often remain productive and meaningful.”

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

Barrier to action

The white paper does not describe the exact chain of events from a customer’s diagnosis to the migration of their assets. But it describes the vulnerability of clients to fraud, the loss of heirs as potential clients, potential regulatory issues, and reputational risk.

The Whealthcare document acknowledges that some counselors have started to act to address the issue.

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

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

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