The 23rd annual Morningstar Investment Conference closedFriday with a lunchtime address from David Laibson, a professor ofeconomics at Harvard University. Entitled “The Age of Reason:Financial Decision-Making Over the Life Cycle,” the hour longpresentation provided attendees with a stark look at how societytreats the elderly, especially in the financial realm.

He began by noting the “two faces of aging,” one that is ofhealthy, active seniors happily living out their retirement; thesecond is more bleak, with dementia involved more often thannot.

“The movie The Note Book featured a woman sufferingfrom dementia and memory loss,” he said. “The manner in which sheis portrayed is one of an elegant, well-dressed senior that gave nohint that she was ravaged by the disease.”

He noted that 20% of those age 65 and older report being takenadvantage with an unsuitable financial product. But headded the figure is significantly lower than reality, asmany seniors never realize they were taken advantage of, andtherefore unable to have it reported.

He then noted when individuals are age 20, they are chargedhigher fees and interest rates, on average, for loans. The fees andinterest rates then decline until they’re in their 50s, before theybegin to rise once again.

“You might say it’s a function of their finances, but the 20 and65-year-olds had better FICO scores,” he said. “So why does thishappen? I’d like to say all loans are commoditized, but the realityis they are a function of supply and demand, and depend onnegotiating skills. The simple fact is those in middle age arebetter negotiators.”

He then turned to credit cards, and described the tactic manycompanies take by offering to waive interest charges for a year onbalance transfers. Included in fine print is the fact that if anypurchases are made using the card, the zero interest portion of thebalance must be paid off first, and the high balance charges arepaid off last.

“It’s a real life financial IQ test,” Laibson said. “Using thecard immediately wiped out what was in essence an interest freeloan. The old and the young didn’t figure it out.”

Increasing, we as a society have a psychological resistance toplanning for our cognitive decline, and he listed specific problemsthat must be addressed.

1. Lack of meta-cognition—we don’t remember that we have badmemories. If we did, we would always put our keys in the same spotso as not to lose them.
2. Need for control—elderly individuals keep driving long pastwhen most should stop.
3. Over-optimism—most individuals don’t believe they willexperience dementia, when statistics show many will.
4. Procrastination—especially in planning for their possiblecognitive decline.
5. Aversion to complexity—people don’t know where to start when itcomes to planning.
6. Aversion to annuitization—annuities sound like a good plan toaddress some of the problems mentioned above, but brand recognitionwith the public is still largely negative. Even with annuities thatare supposedly “good deals,” people walk away in droves.

From an income generation standpoint, Laibson argued the threatof outliving one’s assets is higher now than ever before.

“Approximately 75% of defined benefit pensions elect to be takenas a lump sum,” he said. “And only 5% of defined contribution plansare rolled into annuities.”

For the advisors in the audience, he listed four “must-have”documents to be provided to clients: a durable power of attorney; aliving revocable trust; a living will; and, a health careproxy.

“Estate planning should be the default for every 65-year-oldclient,” he said. “Regular checkups should occur every three tofive years where the next appointment is automatically scheduled,and family participation should be encouraged. The client should beable to opt-out of all of these, but opt-out should be thedefault.”

He stressed the business opportunity that will arise fromaddressing these types of issues. If advisors can protect assetsfrom “mischief,” figure a way to convert wealth into consumption,insure against longevity risk, insure against inflation risk andprovide older investors with a sense of control, then they willparticipate in the management of $10 trillion of financial assetsand the $8 trillion dollars of real estate assets.

“But one of the first issues that must be addressed is thefiduciary issue,” he concluded. “We have it for 401(k) planparticipants, but they are the least vulnerable, as they can keepworking. The demographic that is most vulnerable, the elderly, doesnot have that protection. As a society, we’ve flipped the fiduciaryissue, and we need to flip it back.”