As part of my Financial Advice: A Top Ten List yesterday, I emphasized the value that an advisor can provide by protecting seniors from making mistakes or being defrauded. That (summary) point deserves some additional commentary.
As I noted, research confirms what most of us have seen among our families and friends. Simply put, the ability to make effective financial decisions declines with age, often rapidly.
Increasing evidence suggests that older adults, even those without dementia, often make poor decisions and are selectively vulnerable to scams. Adults ages 60 and older lost an estimated $2.9 billion to fraud in 2010 – a 12-percent increase from the $2.6 billion loss estimated in 2008.
But fraud isn’t the only problem. Research also shows that the ability simply to make sound financial decisions declines as one reaches 60 and beyond. Indeed, financial literacy declines by about 2% each year after age 60, and the rate of decline does not increase with advanced age. Despite that decline, our self-confidence in our financial abilities remains undiminished as we age. That’s a scary combination that a good advisor can guard against.
The realities of dementia make a difficult problem even worse. The prevalence of dementia explodes after age 60, doubling with every five years of age, such that roughly half the population suffers from cognitive impairment in some form (not just the reduced decision-making abilities referenced above) by age 80 or so.
Consider the sad and unfortunate story of Al Davis, the late owner of the Oakland Raiders. Prior to 2003, the Raiders won three Super Bowls and led the NFL with a .625 overall regular season winning percentage. But as Davis declined with age (I have seen no reports that he suffered from dementia) until his death in 2011 at age 82, he refused to relinquish any control over the team. As he declined (while insisting he was as good as ever), so did the Raiders. Only one first round draft choice since 2001 is still with the team. The team went through six head coaches in nine years and lost at least 11 games an NFL-record seven straight seasons. The Raiders haven’t even sniffed the play-offs since 2002, and a new management team is now trying to clean up the mess (although the Davis family may not make it easy).
To be clear, the problem isn’t age per se – it’s health. Healthy people who age successfully can retain the ability to make complex financial decisions and, in some cases, may even improve these skills as they age. That said, age and decline are inevitable and even healthy seniors can readily be duped. A good friend of my mother-in-law who is extremely sharp fell for a common scam whereby a fraudster poses as a grandchild in trouble and in need of money. Indeed, since health problems and age are strongly correlated and, perhaps more importantly (and as with bias blindness generally), since we have a remarkably hard time recognizing it when we are suffering the problem, the idea that we will manage our finances effectively ourselves as we age becomes vanishingly small.