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Mark Miller: Remaking Retirement

Safeguarding Your Wealth From the Effects of Cognitive Decline

Some degree of cognitive decline is inevitable for most. Contributor Mark Miller outlines steps to take today to protect your assets.

The aging brain isn't well-suited to financial decision-making.

A growing body of research shows that cognitive decline starts to reduce our ability to make good decisions about credit in our mid-50s, and our investing decision-making skills fall significantly after 70. More than half of the U.S. population over age 85 suffers from some level of cognitive impairment, according to research by the Center for Retirement Research at Boston College. Within that group, 27% have dementia and another 37% have some level of mild cognitive impairment.

This cognitive decline leaves older people vulnerable to financial fraud and abuse. Combine that with several other trends and you have a perfect storm of financial risk: the increasing reliance on self-managed retirement income through individual savings and 401(k) accounts, growing use of debt by older households, and more problems with computer security and hacking.

Perhaps most worrisome, confidence in our ability to make sound financial decisions does not decline commensurate with cognitive loss. One study found quite the opposite: confidence in financial decision-making ability increases with age.

Almost 1 in 5 Americans older than 65 have been taken advantage of through inappropriate investments, unreasonably high fees for financial services, or fraud, according to a study by the Investor Protection Trust, a nonprofit consumer advocacy group.

Regulators and lawmakers have recognized the threats and have taken action.

"They are all over this topic, as they should be," says Elizabeth Loewy, general counsel for Eversafe, a technology firm that monitors customers' bank and investment accounts, credit cards, and credit reports for potential fraud and abuse.

The Senior Safe Act became federal law in May. It protects banks against possible lawsuits when they report suspicious client account activity to regulators that could indicate fraud. More banks have been training their workers--and implementing technology--to detect problems; the new law lets banks monitor for fraud without worrying about lawsuits from clients or regulatory penalties.

Also this year, a new  rule took effect requiring its broker/dealer members to add a trusted backup contact person for all accounts and to allow members to put temporary holds on fund disbursements when financial exploitation is suspected.

And in 2016, the North American Securities Administrators Association approved a rule requiring financial advisers to report suspected financial abuses to states' securities regulators and adult protective services departments.

But there also are proactive steps you can take on your own to guard against these risks. The protective steps are worth considering for yourself--but also for aging parents who could be vulnerable. Here's a checklist of steps to consider.

Get an early start. Make plans to protect yourself in your 50s or 60s. Procrastination is your worst enemy, since the onset and progress of cognitive decline is difficult to predict.

Start with a financial checkup that includes a review of estate-related legal documents. Have a clear succession plan--a trusted family member to manage your affairs in the event you are unable to do so. Whenever possible, execute legal power of attorney documents for your finances and healthcare.

Simplify. Consolidate accounts and simplify the structure of your portfolio wherever possible, so that a trusted financial adviser, attorney, or family member can easily keep tabs on things for you if the need arises. The risk of cognitive decline also argues for shifting to less complex portfolios and fewer active investment choices.

Work with a fiduciary adviser. Avoid any financial adviser who is not a fiduciary--a legal definition that requires an adviser to put the best interest of a client ahead of all else. This point--and my argument for portfolio simplicity--is illustrated by an important story that appeared recently in The New York Times detailing abusive trading practices by a stock broker in the account of a couple well into their 80s that was being monitored by their daughter.

The fall of the Obama-era fiduciary rule for advisors may complicate the task of finding a trustworthy adviser. But there really is a simple way through the maze. If in doubt, ask anyone you are considering hiring to sign the fiduciary oath--a simple, legally enforceable contract created by the Committee for the Fiduciary Standard. By signing, the advisor promises to put the client's interest first; to exercise skill, care and diligence; to not mislead you; and to avoid conflicts of interest. You can download the oath here.

An array of financial technology and other software solutions can also help protect against elder financial abuse. These are among the solutions worth considering.

Automate and monitor. Eversafe is part of a growing tech startup sector that aims to guard against financial fraud targeting seniors by using software that monitors accounts for irregular activity. These services are especially useful if you are helping to manage the financial affairs of a loved one, perhaps from a long distance. The category also includes True Link, which also offers a robo-advisory service focused on management of retirement income. (For a good run-down of tech options, see this article at Considerable.com).

Short of using one of these services, monitor reliable sources on the latest scams and frauds. The Federal Trade Commission and AARP both have web pages that track the latest scams.

The tricks are always evolving and changing. For example, Medicare is mailing new identification numbers to 59 million Americans this year and in early 2019; phone scammers are targeting program enrollees by calling and telling them they must pay for their new cards, then request their bank account information or Social Security numbers. That opens the door to identity theft.

Monitor credit and identity. The FTC's Consumer Information website provides information about credit and identity monitoring services as well as information on how to keep personal information secure.

Manage passwords. Aside from account monitoring, strong passwords are another must for protection against hackers. If you--or an aging parent--are using a single, simple password across all financial sites, you're vulnerable. Use a password management service such as LastPass or Dashlane. These services serve as a sort of encrypted vault for login credentials. They also make it easy to set complex, unique passwords for each site you use.

Block the scammers. Block unwanted calls from scammers (and direct marketers) by using blocking software such as Nomorobo, If your landline uses voice-over-internet protocol, Nomorobo can use a service called "simultaneous ring" to intercept and block robot-dialed calls; the service is free. For smartphones, Nomorobo offers an app that carries a small annual fee.

Protect your Social Security number. Consider locking down your Social Security number. A growing number of Americans have taken up the Social Security Administration on its invitation to do business with it online by opening up MySSA accounts. But that has increased the risk of identity theft. In 2014, a federal investigation led to the conviction of a Miami man for creating more than 900 fraudulent MySSA accounts, and redirecting roughly $700,000 in benefit payments to bank accounts he controlled.

The SSA has been strengthening security on its website. But last year the agency did advise the public in a blog post that the best way to avoid problems is to create an account to "take away the risk of someone else trying to create one in your name, even if they obtain your Social Security number."

Morningstar columnist Mark Miller is a nationally recognized expert on trends in retirement and aging. He also contributes to Reuters, WealthManagement.com, and The New York Times. His book, Jolt: Stories of Trauma and Transformation, was published in February by Post Hill Press. The views expressed in this article do not necessarily reflect the views of Morningstar.com.