Taking Away Dad's Keys to the Portfolio

Your 401(k) has a well diversified blue chip portfolio and you’ve always seen yourself as a relatively conservative investor. Despite all the macho clubhouse chatter among your golf buddies, you’re unlikely to take a flyer on that supposedly hot new IPO nor are you about to sink any hard earned cash into some speculative limited partnership in the hopes of finding offshore Spanish treasure. And while you’ve certainly never held yourself out to be some kind of small town George Soros or everyman’s Warren Buffet, the combination of responsible savings habits and a little common sense has pretty much secured your financial future. Or has it?

Lately though, a little self doubt has started to creep in around the edges. That semi-annual life insurance bill you were sure you paid somehow lapsed, and your bank’s insistence on constantly changing passwords just to login is making the simple task of checking online account balances maddeningly difficult. While a ruptured Achilles tendon made the decision to hang up the old softball cleats a foregone conclusion, just how are you supposed to know when it’s time to let someone else drive the financial bus so your financial plan doesn’t wind up rear-ending a line of parked cars with you behind the wheel? What if you’re in the passenger’s seat and your partner has already blown through a couple of obvious warning signs? What if you don’t have a financial plan to begin with?

For an increasing number of investors and their adult children, these questions are more than academic. A recent study co-authored by researchers at the University of Michigan’s Social Research Institute and the Federal Reserve Board found that four out of five primary decision makers over the age of 50 continued to make major household financial decisions even AFTER reporting impaired ability to handle money or being diagnosed with memory related problems. Ironically, mild to moderate instances of diminished financial reasoning are frequently overlooked because things like language skills or the ability to perform routine and even complex financial computations often remains intact. In separate studies, researchers at both the Brookings Institute and the National Institutes of Health differentiate between crystallized intelligence (which actually will continue to expand well into a person’s mid 60s) and the fluid intelligence needed to work out sound money decisions. Evidently critical financial reasoning skills involve different areas of the brain than those required for mathematical operations or crossword puzzles. It’s an important distinction.

Unlike divorce or widowhood where the transfer of financial decision making is no longer optional, responding to signs of cognitive memory issues can be as much an exercise in high stakes negotiation as one of practical necessity. Changes to established patterns in household divisions of labor are frequently charged with emotion as one partner might be reluctant to cede control while the other may feel inadequate when faced with the prospects of suddenly having to juggle outside caregivers, taxes, insurance, and a pile of unintelligible financial statements. No wonder denial is such a popular response. One thing is certain however: when memory loss is a factor, maintaining the status quo becomes increasingly difficult and exponentially more hazardous with the passage of time.

While the stakes are somewhat less for those with more modest means and those living on fixed incomes, households with more substantial self directed financial assets almost always have greater risk exposure to poor investment decisions, financial mismanagement, and unfortunately, to fraud. Let’s face it; executing sound money decisions are difficult enough without the manufactured complexity of Wall Street or becoming victimized by creeps that prey on the vulnerable.

All too often the first indicator there may be a serious problem comes after it’s too late. Before an emergency family intervention ever becomes necessary or you find yourself in the middle of an involuntary lifestyle downsizing either for yourself or a loved one, consider the following modest three point proposal to reduce risk.

Let the Sunshine In

 Talk candidly with your principal advisors (Financial, Tax, & Legal) about any family history of dementia or episodes of suspected diminished reasoning. More importantly, commit to periodically reviewing this topic in all subsequent financial planning discussions. Keep in mind that “Dad is always losing his car keys” is probably normal, while “Last month, Dad bought 4 new cars” is probably not.

There Really Is Safety in Numbers

Insist your spouse, partner, or significant other is invested in all critical elements of the financial planning process. Invested means having informed consent with regard to overall financial objectives and an authentic relationship with each of your family’s key advisors.

Don’t Shoot the Messenger

Invite your principal advisors to speak up if they encounter uncharacteristic changes in your thoughts regarding financial matters…especially if they involve radical changes to a documented investment strategy or any unexplained changes in the rate of asset consumption. Resolve that you will never punish any advisor if he or she does speak up.

So how do you know when it’s time? Unfortunately, when it comes to memory loss and financial reasoning YOU probably won’t know when it is the right time to get out of the driver’s seat…but others around you certainly might. With compassion, awareness, and open communication, if and when changed circumstances dictate, it’s possible for to Dad transition towards becoming a contented passenger as he hands over the keys to the portfolio pretty much on his own.

Michael Reid, CFA is a Managing Director and Partner at Exchange Capital Management. The opinions expressed in this article are his own.