Risk assessment tools are becoming ever more popular as financial advisors seek to more effectively align investment portfolios with their clients’ expressed levels of risk tolerance.But portfolio risk, as important as it is to acknowledge and measure, is only one class of risk that confronts investors. Adults over the age of 50 control roughly 83% of the wealth in the US. And the average financial advisor client is about 63 years old. So, the typical investor with wealth to manage (and lose) is an older adult.
And what do we know about older adults? Approximately 80% of people over 50 in the US suffer from one or more chronic illnesses like diabetes or high blood pressure. Which also means they are more likely to experience medication errors and side-effects. The frequency of dementia doubles every 5 years starting at age 60, and about half of older adults have some form of cognitive impairment by the time they reach their mid-80s. Finally, old age can take its toll on our emotions as well. According the CDC, the most common “disease” among older adults is… loneliness.
So, putting two and two together, older adults experience “peak wealth” just as they become increasingly less capable of making good financial decisions.
How is that not risky?
There are numerous financial risks that increase as we age and can ruin any financial plan, no matter how well portfolio risks are aligned or managed. I call these “age-related" financial risks. A short list of these risks would include:
- Health care costs. This includes not just insurance but out of pocket and end of life-related expenses.
- Long-term care costs. Many people want to die at home, but most of them will require 24 by 7 care late in life at an average cost of $25 per hour. Assisted living facilities in most metropolitan areas cost $50,000 a year or more, while a nursing home bed can easily cost over $100,000 on an annual basis.
- Dementia. An estimated one in ten people over the age of 65 have Alzheimer’s, and Alzheimer’s sufferers account for only about half of all individuals with dementia.
- Behavioral conditions. Traits like impulsiveness, loneliness, gullibility, and over-confidence are not often associated with dementia, but their prevalence typically increases with age and their effects on financial decision-making can be devastating.
- Chronic illnesses like heart disease, cancer, or high blood pressure. Because they tend to preoccupy, weaken, and distract, any of these conditions can compromise financial decision-making.
- Medication errors and side effects. Older adults take more medications, and virtually all have side effects, often (negatively) influencing behaviors and cognitive capabilities.
- Gaps or errors in estate plans. The absence of wills, trusts, powers of attorney and other legal documents can have severe financial consequences.
- Lack of transparency in financial organization. Too often when an older adult dies the surviving spouse and other family members have little knowledge of how to find and access money and other valuables.
- Elder caregiving responsibilities. Many older adults provide financial assistance to parents or spouses, and taking care of a relative can be very expensive.
- Driving accidents. Older drivers are more likely to be injured or die in car crashes than younger drivers, making driving accidents more costly.
Shouldn’t financial advisors be paying as much attention to these “age-related” financial risks as they are to traditional portfolio risks?
Surveys of investors consistently show that getting help with health-related expenses is the most important assistance they want from their advisor beyond core financial advice. Furthermore, most older adults are (way) more interested in controlling health care costs, getting help with aging parents, preventing financial exploitation, avoiding being a burden on their children, and postponing dementia than they are in analyzing the composition of their investment portfolios.
So, if you are a financial advisor, it’s time to start paying as much attention to age-related risks as you are now to investment portfolio risks. It may be hard at first, but your clients will appreciate it. A lot.