Investment Advisor Interests   10/19/2022

Protecting Senior Clients as an Investment Advisor

By Jon Talamas

Protecting Senior Clients as an Investment Advisor

Your senior clients can become targets of financial exploitation. Are you ready to protect them against determined fraudsters and abusers?

As an investment advisor, you’re no stranger to seeing senior financial fraud and abuse. Perhaps you’ve seen an elderly client lose money to a predatory relative or send money to an internet or telephone scammer. You’ve also seen broker-dealers and registered investment advisors (RIAs) tighten their senior-protection practices in response to alarmed regulators.

So here’s the question: Are you fully prepared to protect your senior clients in this dangerous environment? If not, what should you do next?

Seniors Vulnerable to Investment Fraud and Abuse

Senior exploitation is a big issue in the financial services industry. It’s no wonder since losses are eye-popping. The North American Securities Administrators Association (NASAA) estimates that bad actors steal $37 billion from seniors yearly. Greedy relatives and financial criminals target seniors because they’re easy prey. According to the Consumer Financial Protection Bureau (CFPB), the elders most likely to succumb to investment fraud are 70 to 79 years old, with an average loss of $45,300.

The U.S. Securities and Exchange Commission (SEC) says senior financial exploitation is a big problem and is likely to get worse. However, fixing it is complicated because so many forces are at play. One is demographics. Vigilant Compliance LLC projects that 78 million senior citizens will live in the United States by 2035. By 2060, the median age in America will rise to 43, up from 38 today.

As more seniors live longer, they amass more wealth, making them targets for abusers and criminals. Furthermore, replacing defined benefit retirement plans with defined contribution plans puts pressure on seniors to make their own investment decisions, even though they might be ill-equipped to do so due to a lack of knowledge or mental capacity.

Finally, older Americans are more vulnerable to financial exploitation because their health can diminish as they age. According to the SEC, aging often produces bodily changes that make seniors susceptible to crime. These include cognitive problems, physical illnesses and inability to perform the activities of daily living (ADLs). All combine to make seniors more dependent on others… a Pavlovian bell for abusers and criminals.

The Anatomy of Senior Financial Exploitation

To decrease the odds of your senior clients getting exploited, it’s essential to understand some key concepts.

According to the SEC, senior financial exploitation is the “illegal or improper use of an older adult’s funds, property or assets.” This use can occur in any setting (home, community or facility) or in any relationship where a senior trusts another person who targets the senior based on age or disability.

Financial exploitation can take the form of a stranger stealing from a senior (financial or investment fraud) or family members, friends or others violating a senior’s trust by stealing something of value (financial abuse).

The crime of elder financial exploitation comes in five varieties: theft, fraud, misuse of authority, legal document abuse and extortion and manipulation. Examples include:

  • Stealing a senior’s cash
  • Making unauthorized bank account withdrawals
  • Cashing someone’s pension or other checks without permission
  • Using a senior’s credit card without permission
  • Transferring property deeds to third parties without authorization
  • Misuse of power of attorney
  • Stealing a senior’s identity to make purchases or to open new financial accounts

The U.S. Senate Special Committee on Aging designated financial exploitation as one of its top ten consumer scams. However, deception and trust abuse are almost always at play regardless of the specific crimes involved. And they leave seniors with less money in their portfolios and no ability to replace their losses through labor or asset appreciation.

The Compliance Landscape

Although senior investors remain targets of financial exploitation, U.S. regulators have responded with new and amended rules and stricter enforcement. Whether you operate as a securities broker or an investment advisor, you can now leverage regulations that empower you to get involved when you suspect someone is stealing from—or abusing—a senior client.

For securities brokers, the SEC approved the new FINRA Rule 2165 and signed off on an amendment to FINRA Rule 4512. Rule 2165 allows broker-dealers to put temporary holds on withdrawals from senior accounts when they suspect clients are being exploited. It also requires contacting a trusted contact or another designated party after the hold takes effect. Rule 2156 also requires record retention and staff training while providing a safe harbor from other FINRA rules when senior fraud or abuse is on the table.

The amended Rule 4512 requires FINRA firms to obtain the name and information of a trusted client contact. This helps them respond effectively to suspected exploitation. Like Rule 2165, Rule 4512 requires firms to retain records that relate to a specific incident.

As products of FINRA, the two rules target only broker-dealers and their representatives. However, the North American Securities Administrators Association (NASAA) issued a Model Act to Protect Vulnerable Adults from Financial Exploitation that applies to broker-dealers and state-regulated investment advisors. Thirty-three states enacted the model regulation (or a version of it) by early 2022.

Like FINRA’s Rule 2165, NASAA’s regulation permits the delay of disbursements when an advisor suspects exploitation. It also requires reporting to state Adult Protective Services (APS) agencies and the sharing of relevant records with such agencies. Most importantly, the model regulation provides for civil and administrative immunity against state enforcement actions but not against consumer lawsuits. (FINRA Rule 2165 also provides a safe harbor against FINRA enforcement but not against civil lawsuits from customers or their legal representatives.)

The final piece of the regulatory landscape is the federal Senior Safe Act, which became law in 2018. The statute provides investment advisors and other “covered financial institutions” with immunity against liability during a civil or administrative proceeding for reporting potential senior fraud or abuse. The law provides immunity for both advisors and financial institutions, as well as employees working in a supervisory, compliance or legal capacity.

The Act requires that investment professionals and employees receive training on identifying and reporting senior exploitation before submitting a report. They must consider suspected fraud and abuse “in good faith” and “with reasonable care.”

Finally, even though the SEC lacks statutory authority for protecting seniors, it does oversee investment advisors through its Division of Examinations (formerly the Office of Compliance Inspections and Examinations). During exams of broker-dealers and investment advisors, it asks questions such as:

  • How do your firm’s policies and procedures define seniors?
  • How do you monitor retiree accounts?
  • How do you identify and protect clients with diminished capacity?
  • Do you have a policy for documenting and reaching out to trusted client contacts?
  • Do you provide special scrutiny of beneficiary changes?
  • How do you train employees on identifying and responding to potential senior exploitation?

How to Protect Your Senior Clients

The first step is to understand when regulations and laws apply to “eligible investors.” Your clients must be 65 years or older, have diminished capacity, or be subject to a state APS law to be considered eligible. Adult Protective Services (APS) laws vary from state to state, so check with your state’s authority for further information.

Next, make an effort to recognize the signs of diminished capacity and specific indicators of senior fraud and abuse. Here are some significant things to watch for:

Signs of diminished capacity:

  • Problems doing simple math
  • Inability to understand key features of a financial account
  • Difficulty managing a checkbook
  • Inability to remember basic features of wills, annuities or mortgages
  • Problems expressing thoughts and concepts in words
  • Failure to comprehend the implications of financial decisions
  • Inability to remember prior conversations
  • Coming to a meeting without the usual personal grooming or careful attire
  • Becoming overly anxious or paranoid about their money
  • Failure to handle their financial obligations correctly or on time

If a person exhibits several or more of these characteristics, begin watching for specific signs of exploitation.

Serious exploitation red flags to watch for:

  • Making repeated and unusual wire transfers or cash disbursements
  • Being noticeably nervous when speaking with you, either during an office meeting or over the phone
  • Appearing in your office with unfamiliar friends or relatives
  • Making an unexpected transaction (example: closing an account)
  • Not knowing specific details of their investment account
  • Being unable or reluctant to speak to an advisor without the involvement of someone else
  • Receiving an unusual financial windfall but being unwilling to discuss it with you
  • Making sudden and unexpected revisions to critical financial documents like wills, account beneficiaries, trusts or powers of attorney
  • Making a large withdrawal or closing an account with no concern over penalties and taxes

If you notice signs of diminished capacity and specific behaviors suggesting fraud or abuse, it’s time to report the matter to your firm’s principal or compliance officer. Being able to detect the signs and symptoms of financial exploitation is crucial. But what you do after you hoist your red flag will prevent clients from getting hurt.

Best Practices for Senior Protection

The SEC recommends you adhere to the following practices to keep your senior clients financially safe.

First, establish and follow appropriate policies for senior protection. The policies should define what you should do once you suspect financial exploitation. The policy should also include escalation procedures that begin at the first sign of trouble and then become increasingly pointed as the evidence of exploitation grows.

Second, study relevant laws and regulations. Leveraging regulatory safe harbors will help you protect your senior clients, yourself, and your firm.

Third, train your employees on the symptoms of diminished capacity and the signs of financial exploitation. Knowing what to look for and how to record and report unusual behavior is essential.

Fourth, pause account disbursements when you suspect exploitation.

Fifth, reach out to a senior client’s trusted contact when you become concerned with cognitive health or potential financial fraud or abuse.

Sixth, when suspicions become stronger, report your concerns to internal firm authorities and cooperate with any resulting internal investigations.

Seventh, if an internal investigation finds cause for concern, notify your state or federal regulator and local law enforcement.

What to Ask Before a Cash Disbursement Request

Suspicious account withdrawals can be telling symptoms of senior financial exploitation. Don’t ignore your hunches. Ask open-ended questions to see if a fire is raging behind the smoke, including:

What are your plans for the money? If your client questions your need to know, say that federal anti-money laundering (AML) regulations require you to understand the purpose of all account withdrawals. Then follow up with probes to uncover specific needs for the money and why the need occurred now.

Where is the money headed next? In the answer, listen for suspicious words like “bitcoin,” “gift or pre-paid cards,” “cash payments,” or checks made out to unknown parties.

How and when will they replace the money? Scammers often promise to return client money at some point. Probing the “terms” of the “transaction” will help you determine whether it’s legitimate.

Why is there so much urgency? Being pressured to send money now is a clear giveaway of a scam. Explaining this to senior clients might prevent them from experiencing devastating financial loss.

Reporting Is Crucial

When it comes to senior investor protection, it’s all about reporting. Once you’re confident there’s a problem, report your concerns to your chief compliance officer (CCO). Be prepared to back up your suspicion with written evidence. Once all facts are on the table, your CCO will decide if reporting to outside authorities is necessary. CCOs will also decide to delay a disbursement based on the fact pattern in the case.

External reporting is important, as well, since many states have mandated notice when investment professionals—or financial institutions—suspect senior fraud or abuse. In other states, reporting is voluntary. Either way, it’s up to you to know what level of reporting applies. Also, remember that state rules are based on where the client lives, not where your office is domiciled.

In conclusion, as an investment advisor, protecting your senior clients is essential to your mission. Fortunately, today’s regulations let you get involved without incurring liability (usually). Are you ready to do whatever’s needed to protect your clients against financial exploitation?

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