Dementia Can Wreak Havoc on Family Finances

by Roya Wolverson

BILL BRIDGWATER HAD the investing bug. Even as he was busy working as an executive for several IT companies, he made time to juggle more than $1 million in assets. At any given time, he was buying and selling foreign stocks, municipal bonds, certificates of deposit and real estate. On family vacations, in lieu of a novel, Bridgwater brought a laptop to the beach to check on his investments. "Nothing could come between me, my phone and my emails except a coast-to-coast flight," says Bridgwater, who lives outside Denver.
But something did get in the way of Bridgwater's mental acuity. At work his concentration began to slip, so he pulled all-nighters to try to keep up. Soon problems were cropping up in his investing life. Picking stocks, which for decades had been an enjoyable hobby, became an overwhelmingly complex chore. Bridgwater couldn't even muster the focus to correctly fill out his checkbook. When he did manage to get the numbers written in the right order, he would mix up how to write them on the next line or tear the carbon out and have to call his bank. He quit his job, and after consulting with numerous doctors, Bridgwater, then 48, was eventually diagnosed with early-onset Alzheimer's disease. He put his wife in charge of his personal accounts, moved his assets into simpler, more conservative investments and became active in the Alzheimer's Association. But by the time he figured out what was wrong, he had already lost tens of thousands of dollars.
Wild mood swings. Memory loss. Confusion. The symptoms of dementia have long been the stuff of nightmares for people as they grow older. But there's an often overlooked side effect: how the malady can cause people to make terrible financial decisions. According to dementia experts and victims' family members, the problems are often a lot more serious than forgetting how to balance your checkbook. People suffering from dementia have looked on as their investments plunged in value, misread how much money they owed in taxes, even told their brokers to buy when they meant to say "sell." Already, there are thousands of cases of seniors beset by dementia who are trading stocks to their own detriment or investing in risky products that have led each to lose hundreds of thousands of dollars. It's a situation that leaves everyone from brokers and financial planners to family members caught in a tragic bind. Financial matters can become treacherous for people who "may not even be able to spell their own name," says John Gannon, director of investor education for the Financial Industry Regulatory Authority, or FINRA, the broker-funded agency that oversees brokers and securities firms.
And things could get much worse. A Duke University study, funded by the National Institutes of Health, estimates that 14 percent of people over age 70 have some form of dementia. If that trend holds, then more than 11 million baby boomers could develop the condition. Combine that unsettling statistic with the fact that this demographic controls more than $19 trillion in assets, and experts fear that over the next decade boomers will be increasingly at risk of unwittingly destroying their own nest eggs. At the moment, there is little in the way of laws, standards or policies to deal with the problem. Some brokerages and regulators "are almost blind to the idea that folks have diminished capacity over the years," says Seth Lipner, a Garden City, N.Y.-based securities lawyer.
Like many of these cases, the story of Janet Hilowitz and her now-deceased mother, Eleanor, started as a disagreement over investment styles and turned into a multiyear struggle to prove that Eleanor had dementia. In the mid-1990s, Janet, a retired university professor in Boston, started to question her mother's financial decisions after Eleanor, then in her early 70s, moved more than 75 percent of her portfolio into technology stocks. Janet says she feared the move was too risky, but her mother was intensely stubborn and accused Janet of trying to meddle with her money. For years nothing anybody said could persuade Eleanor to alter her investments. But eventually, Janet claims, her mother admitted she couldn't keep up with her stocks anymore. That concession came in 1999 and prompted a worried Janet to contact her mother's broker at Smith Barney. Janet wanted her mother's investments moved into safer holdings, but the brokerage wouldn't help. The reason, according to Janet: She was not authorized to trade on her mother's account. It took years of court hearings, doctor appointments and psychiatric analysis for Janet to prove that her mother was, in fact, incapacitated. And while Janet argued to get control of her mother's accounts, Eleanor's assets rose and fell with the tech boom. By 2003, the year Janet was granted guardianship to manage her mother's account, the bursting of the tech bubble had claimed almost $1 million, most of her mother's life savings.
The brokerage's caution might have been justified. After all, Smith Barney had worked with Eleanor for many years. And when Janet requested to have her mother's assets shifted into more-conservative investments, she had neither her mother's permission nor power of attorney. According to Janet and her lawyer, Janet took Smith Barney to arbitration, arguing that the company was not acting in her mother's best interests. She lost. (Smith Barney won't comment on the specifics of any case. "We take retirement advice and servicing our clients very seriously and have taken great strides in training and informational material for both clients and employees," says company spokesperson Alex Samuelson.)
Some brokers try to be proactive and talk to family members if they suspect their clients are losing their faculties. "Usually, I notice the problem before the family does," says Alexandra Armstrong, a Washington, D.C.-based financial planner who has dozens of clients over age 65. More often, though, brokers and investment advisers have so little contact with an aging client that subtle shifts in behavior can easily fly under the radar. In Roseville, Calif., for example, Jim Wilson grieved as his mother, Ruth, far away in Connecticut, developed dementia. Because he was focused on dementia's outward symptoms, Jim says he didn't know about an account containing stock options Ruth had inherited from her mother. Complicating the matter: Ruth lost touch with her local brokerage, which eventually transferred her account to a Florida-based broker she would never meet.
Years later Jim got a call from his mother, who had a $33,000 capital gains tax bill stemming from the account. He discovered that most of the $228,000 in the account had been invested in risky, high-yield junk bonds — not a traditionally sound investment for an older person. Jim didn't know it at the time, but his mother had received a call from the Florida-based broker months earlier to get permission to change the account's investments. Jim says his mother had no idea what she had authorized the broker to do. "I'm sure she was happy to chat, because she was lonely," Jim says. He took the brokerage, Advest, to arbitration and won $16,000. The broker was reprimanded, but Jim wasn't satisfied. "He clearly didn't know his client and took advantage of her," he says. Merrill Lynch, which now owns Advest, declined to comment.
Of course, regulating how securities are sold to seniors is no easy task, partly because dementia is hard to prove. Financial advisers say investors with dementia can be confused and then an hour later be totally lucid. The brokerage industry and the agencies that regulate it also do not want to be responsible for trying to figure out whether a client has dementia. "I'm not a medical professional," says Mary Shapiro, chief executive of FINRA, the broker regulator. Granted, there are laws against flat-out fraud, but FINRA's guidelines on investors who suffer from diminished capacity are just that, guidelines. Unlike financial advisers, who are legally bound to act in a client's interest first and foremost, brokers are required only to sell clients products that are "suitable." FINRA has fined brokers whom it felt took advantage of mentally incapacitated clients, but it is loath to write specific rules, Shapiro says, because every client is different. Stricter limitations on brokers could also lead to ageism, wherein brokers, leery of lawsuits, shun older clients regardless of their health. Rather, brokers and financial advisers have to find ways to be cautious with older clients without "stereotyping when Grandpa walks in," says John Rother, the public-policy director for AARP, the senior advocacy group.
Indeed, among regulators, politicians and some advocacy groups, writing new laws or regulations regarding mentally impaired investors has taken a backseat to merely getting people educated about the topic. The Senate Committee on Aging is looking at introducing legislation that would require stricter limitations to prevent outright fraud by brokers and financial advisers who intentionally mislead clients with phony "senior specialist" titles or other designations. The Securities and Exchange Commission is aware of the problem of investors with diminished mental capacity — it made the issue a topic at its annual Senior Summit in September. The AARP released a booklet this spring in conjunction with the Financial Planning Association about how to deal with clients as they age, but the organization doesn't have any position on new policies.
Even under existing rules, it can be difficult to finesse a client into doing what is financially "suitable" if the client, like Hilowitz's mother, wants to do something else. Brokers also say that being too forceful with senior clients can anger them or send them running to another broker. "Unless the person is clearly incapacitated, they have to make their own mistakes," says elder-care attorney Linda Anderson. Bridgwater, the former IT executive, blames himself for his financial losses. In one slipup, he lost $9,000 when a stock he had held for several years suddenly dropped over a period of two weeks, during which he was struggling with concentration. Even in situations where he lost money through actions taken directly by his broker, Bridgwater still considers himself responsible. When, for instance, he called his Merrill Lynch broker to request that his IRA be rolled over to his Smith Barney account, the broker instead cashed it out and sent him the proceeds, leaving Bridgwater with thousands of dollars in capital gains tax he could have avoided. Bridgwater realized the mistake only when he received a check in the mail for the proceeds — he could not remember what had transpired over the phone and wondered if the broker had erred. Bridgwater now believes he only thought about telling the broker to roll over his IRA, and when he actually articulated it, he must have gotten it wrong. He chalks it up to an "Alzheimer's moment."
And there are plenty of healthy, active senior traders who have no plans to quit investing. Bruce Bailey, 80, began seriously playing the market only after he was in his early 70s. His health is great — "I don't have any health issues except a hard head," he says — and his investing interest has grown with age. Bailey says his portfolio is doing very well; the retired Army colonel started with stocks but these days likes investing in oil futures. And the Pensacola, Fla., resident loves swapping investment ideas with his adult children, along with thoughts on the economy, the stock market and geopolitics. But when asked which company manages his brokerage account, Bailey goes blank, then spends several minutes searching for an account statement.
"Scottrade," he says with an embarrassed chuckle. "I don't know how I just forgot that."