Diminished Financial Capacity

Managing Generational Wealth: Part 2

Diminished Financial Capacity




According to the SEC Investor Bulletin and Consumer Advisory: Diminished Financial Capacity is defined as a decline in a person's ability to manage money and financial assets to serve his or her best interests, including the inability to understand the consequences of investment decisions. When people of any age lose the capability to manage their finances, they may also become more vulnerable to investment fraud and other forms of financial abuse. This is a serious disrupter to the processes of managing and transferring generational wealth.


Medical Experts agree that impairment in a person’s activities of daily living (ADLs) accompanies cognitive and behavioral symptoms that result in the brain’s inability to process information properly. This can and will impact a person's ability to make sound financial decisions.


Activities of Daily Living (ADLs) include:


  1. Bathing: This involves getting into a tub or shower by yourself.

  2. Dressing: Putting on any necessary item of clothing (including undergarments) and any necessary braces, fasteners, or artificial limbs.

  3. Transferring: This means getting into a bed, chair, or wheelchair. This could also include help up and down stairs or in and out of a vehicle.

  4. Toileting: you know…Getting to and from the toilet.

  5. Continence: The ability to retain urine or feces until the proper time for their discharge.

  6. Eating: This refers to feeding yourself for daily nutrients. You do not need someone pureeing your food, so it can be eaten or reminders to eat.

Instrumental Activities of Daily Living (IADLs)


As ADLs measure many key activities needed for independent living. Caregivers use an additional list of daily living activities called Instrumental Activities of Daily Living (IADLs) which includes more complex independent living tasks. This include::


Memory Care and Stimulation (Alzheimer's and Dementia) ADL. The ability or inability to perform this ADL can be used as a very practical measure of a Senior Citizens ability to handle their financial affairs. When a person cannot handle their personal finances, this is when a caregiver or family member steps in. At this point…vulnerability begins.


Diminished Financial Capacity


The Centers for Disease Control and Prevention (CDC) states that Cognitive decline, ranging from mild cognitive impairment to dementia, can have profound implications for an individual’s overall health and well-being. Older adults and others experiencing cognitive decline may be unable to care for themselves or conduct necessary activities of daily living, such as meal preparation and money management.


The inability to manage one’s personal finances is called Diminished Financial Capacity. Financial Capacity can be defined as financial literacy, checkbook management, bank statement management, insurance, and investment management.


Warning Signs of Diminished Financial Capacity


Memory lapses: examples include missing appointments, failing to make a payment. Making multiples of the same payment. Forgetting to bring documents or where documents are located.


Disorganization: examples include mismanaging financial documents, and losing or misplacing bills, statements, or other documents.


A decline in checkbook management skills: examples include forgetting to record transactions in the register, incorrectly or incompletely filling out register entries, and incorrectly filling out the payee or amount on a check.


Mathematical mistakes: declining abilities to do basic oral or written math computations, such as making a simple change in the grocery store.


Confusion: examples include difficulty understanding basic financial concepts like mortgage, loan, or securities; difficulty understanding previously understood concepts.


Poor financial judgment: examples include newly found interest in get-rich-quick schemes or radical changes in investment strategy.


Four Steps to Plan for Diminished Financial Capacity and Illness


The Securities and Exchange Commission's (SEC) Office of Investor Education and Advocacy and the Consumer Financial Protection Bureau's (CFPB) Office for Older Americans offer advice on how to prepare for Diminished Financial Capacity and Illness.


  1. Organize important financial documents: Store financial documents in a safe, accessible location. Give copies to trusted loved ones or let them know where to find them.

  2. Provide your financial professionals with trusted emergency contacts: If you work with a financial professional, provide that person with emergency or alternate contact information in case he or she cannot contact you or suspects something is wrong. You may wish to discuss with your financial professional what you would consider to be an "emergency," and specify when he or she may contact someone on your behalf.

  3. Create a Durable Financial Power of Attorney: Making a durable financial power of attorney ensures that someone you trust will be on hand to manage the many practical, financial tasks that will arise if you become incapacitated. For example, bills must be paid, bank deposits must be made and someone must handle insurance and benefits paperwork. Many other matters may need attention as well, from property repairs to managing investments or a small business. In most cases, a durable power of attorney for finances is the best way to take care of tasks like these.

  4. Health Care Power of Attorney: We need to point out that a durable power of attorney is not the same as a health care power of attorney. Your health care power of attorney can give very broad authority to direct your medical care. To carry out your wishes and make decisions for you. Your agent will always be allowed to:

  5. review your medical records

  6. grant releases to medical personnel so that they can perform necessary treatments

  7. go to court, if necessary to ensure your wishes are followed

  8. hire and fire medical personnel, and visit you in a hospital or other health care facility.

This should allow your agent to do everything needed to make sure

your health care wishes are carried out. If they are not, to get you

transferred to another facility or to the care of another doctor who will

enforce them.


Safety Net

Speak up: if something goes wrong: If you ever think someone is taking advantage of you, or that you've been the victim of a fraud, speak up. Sadly, sometimes even financial professionals and people we think we can trust commit financial crimes. If this happens to you, you're not alone and the sooner you let someone know about it, the better chance there is of putting an end to it.


Be Quick to File a Complaint: If you have an issue with a financial professional or firm, you can submit a complaint to FINRA at www.finra.org/investors/investor-complaint-center. Investors can also call (301) 590-6500. And senior investors can call the FINRA Securities Helpline for Seniors® toll-free at (844) 574-3577.


If you have an issue with a broker or investment adviser, you can also submit a complaint to FINRA at www.finra.org/complaint. You can also complain to the Securities and Exchange Commission (SEC) at www.sec.gov/complaint.shtml or call (800) SEC-0330.


If you have an issue with a consumer financial product (such as a mortgage or credit card), you can submit a complaint to the CFPB. Visit consumerfinance.gov/complaint or call (855) 411- 2372.



Resources and References


  • National Center for Biotechnology Information, U.S. National Library of Medicine |https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3622716/

  • Healthy Brain Initiative | Centers for Disease Control and Prevention (CDC) |https://www.cdc.gov/aging/healthybrain/index.htm

  • Worried Someone You Know May Have Diminished Financial Capacity? Ryan Wilson – AARP |https://blog.aarp.org/2014/11/04/worried-someone-you-know-may-have-diminished-financial-capacity/

  • Steps to Plan for Diminished Financial Capacity and Illness |http://www.finra.org/investors/highlights/steps-plan-diminished-financial-capacity-and-illness

  • Investor Bulletin and Consumer Advisory: Planning for Diminished Capacity and Illness |https://www.sec.gov/oiea/investor-alerts-bulletins/ib_illness.html

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