More than 5 million Americans have Alzheimer's disease, more than 400,000 are living with multiple sclerosis (MS) and millions more are living with myriad chronic illnesses. The current and potential client base with these issues is large, and as Americans age it will only grow.

Chronic illness affects every aspect of wealth management. Clients, and likely even you as an advisor, may be uncomfortable addressing the issues. Because these matters are so important, if you feel discomfort about asking difficult personal questions, you'll have to work through it.

Myth Busting

The knee-jerk reaction of most wealth managers and estate planners to clients with chronic illness is dangerously wrong. Let's dispel some of the most common myths:

Myth: Clients with chronic illness need liquidity.

Reality: Some clients may have significant savings, an insurance safety net and continued earnings from employment. Others will not. Making assumptions won't serve clients well.

"Many clients with chronic illness prefer more liquidity," notes Gary Greenbaum, principal of Greenbaum and Orecchio, a wealth management firm in Old Tappan, N.J. While some clients prefer to express liquidity in terms of a percentage of the portfolio, Greenbaum encourages them to consider how many years of expenses can be supported. "If substantial liquidity is maintained, a barbell investment strategy might be used to offset the low returns anticipated on the overweight allocation to cash," he notes. Bear in mind that this strategy may have higher volatility risk than alternative strategies.

Myth: Clients with chronic illness should invest with a short-term horizon.

Reality: Many clients with chronic illness need long-term, not short-term investment plans. Even for some clients with a short life expectancy, the magnitude of wealth and the nature of the estate plan may create long-term horizons for certain buckets of assets that will almost assuredly be bequeathed to heirs.

But there is significant variation, not only between different illnesses, but also among clients living with the same illness. Clients with Alzheimer's disease generally survive about four to eight years after diagnosis, although some have survived as long as 20 years. Multiple sclerosis generally has no impact on longevity. Cancer prognoses vary wildly, from full recovery to a life span of weeks. Again, don't make assumptions. Let your client lead you to the facts.

Myth: Clients with chronic illness need special-needs trusts.

Reality: Some chronic illnesses, such as early-onset Parkinson's or Alzheimer's, strike at relatively young ages. However, Parkinson's generally is diagnosed when a client is in his or her sixties. The average age at which Alzheimer's disease is diagnosed is 73. Thus, many clients with chronic illnesses have had a full work and career life and may have enough assets that a special-needs arrangement (e.g., in a spouse's will) is not an appropriate solution.

Myth: Budget projections are standard.

Reality: Some planners actually use the same canned assumptions for most of their clients. Often, they are inappropriate. When chronic illnesses are diagnosed at later ages, for instance, many clients will have already acquired long-term-care coverage. On the other hand, if a client's health insurance changes, the entire financial picture could be imperiled. For example, if a client is taking Copaxone for multiple sclerosis, insurance may reduce the cost to a nominal monthly copay. A change or elimination of coverage could trigger a $15,000 to $20,000 annual cost.

Similar risks exist for many clients. What, for instance, would it cost to make a home accessible? Greenbaum compares the cost of modifying a home home for accessibility, or to provide for caregiver quarters, with other options such as assisted living. The budget "what-ifs" are complex and uncertain.

Myth: If you face the uncertainties of a chronic illness, you cannot bear the same level of investment risk other clients would accept.

Reality: Many chronically ill clients have substantial wealth and can make the same risk/return decisions any other client might choose. Many people with chronic illnesses survive for decades. Structuring a portfolio with inadequate risk might leave these clients unprotected against the ravages of inflation-or worse, out of money. Also, some chronically ill clients may reasonably determine to accept a higher level of risk to meet long-term investment goals.

Say, for example, a client is age 28 and living with multiple sclerosis. He has a successful career but anticipates that by age 50 he will have to retire because of chronic fatigue and other symptoms. "A possible asset allocation for such a client might be heavily weighted toward equities and alternatives to create sufficient wealth to retire at 50, an allocation that might strike the typical 28-year-old as highly unusual," says Jane Newton of RegentAtlantic Capital in Chatham, N.J.