Financial fraud perpetrated against seniors and those nearing or in retirement is a matter of great concern to regulators and investor attorneys. The segment of the American population age 65 years and older is expected to double over the next 25 years. By 2030, the 65-and-older population will comprise 72 million people, or 20% of the population.
In the context of investments, a customer’s age and stage in life are important factors that a brokerage firm and investment adviser must consider in determining whether a particular investment or investment strategy is suitable for the customer. A good rule of thumb in investing is that one should not put money that may need to be withdrawn and spent in three to five years in any risk asset (e.g., stocks, bonds, alternative investments; essentially anything with more risk than a certificate of deposit or money market fund). Age and the proximity to retirement directly affect an investor’s time horizon. Seniors often need more liquidity to meet unexpected expenses, such as medical expenses.
The Financial Industry Regulatory Authority (FINRA) published a notice reminding its brokerage firm members of their obligation to evaluate the suitability of potential investments in light of the customer’s age, life stage and liquidity needs, especially with regard to seniors. More specifically, FINRA admonished firms and their representatives to consider factors such as:
- Whether the customer is employed, how long s/he plans to work (and impliedly, whether the customer has any health issues that would impact his or her ability to earn income)
- The customer’s recurring expenses, including, for example, whether the customer has a mortgage
- The customer’s income and sources of income and whether it is enough to meet recurring expenses (and related to this, whether the customer has a liquid “rainy day” fund to cover unexpected expenses)
- The amount of the customer’s retirement savings and how those funds are invested
- Whether the customer has adequate health insurance or will rely on investment assets to cover both expected and unexpected medical costs
Certain products or strategies – structured products and other alternative investments, for example – pose risks that are unsuitable for most seniors. In today’s low interest rate environment, advisers and investors may be tempted to overreach for yield and buy higher-yielding structured products. FINRA warns its members that structured products are typically based on derivatives that pose risks and work in ways that few advisers or investors are in a position to fully understand. Advisers and investors need to appreciate that higher yield necessarily means higher risk of loss of principal. There is no such thing as a safe high-yielding investment.
In addition, many products, such as variable annuities, equity indexed annuities, non-traded REITs, and limited partnerships, have withdrawal restrictions and penalties, and lack liquidity. FINRA warns that investing IRA or other retirement savings in those and other high-risk investments, such as collateralized debt obligations (CDOs), or funds that invest in them, is almost always unsuitable.
Private (Reg D) offerings are another danger zone for seniors. These investments are always high-risk, illiquid, and lack transparency. The risks are often misrepresented and not disclosed by selling agents. All too often, they are Ponzi schemes. According to the federal regulation that allows them to be exempt from registration with the SEC (Reg D), they are supposed to be sold only to eligible “accredited investors,” such as those with more than $1 million in net worth. However, FINRA warns that “eligibility does not equal suitability.” Private (Reg D) offerings are simply unsuitable for most investors, especially retirees living on a fixed income.
FINRA is also concerned about the suitability of the investment holdings of some pension plans, particularly those that involve relatively new and volatile securities, such as leveraged and inverse leveraged exchange traded funds, niche exchange traded funds, synthetic (derivatives-based) exchange traded funds, and equity tranches of collateralized mortgage obligations (CMOs).
The complexity and extreme risks associated with some of these newer products created by Wall Street are such that FINRA has warned that “even institutional customers that have the general capability to assess risk may not be able to understand a particular instrument, particularly a product that is new or that has significantly different risk and volatility characteristics than other investments made by the institution.” If FINRA is worried that pensions and other institutional investors cannot understand Wall Street’s new products, it follows that individual investors should avoid them.
The use of aggressive, high-pressure sales tactics designed to overcome risk-aversion is another area of concern for regulators. Such tactics are often accompanied by a free lunch or dinner. FINRA warns that these so-called “seminars” are often used to promote sales of unsuitably risky, high-commission, financial products. FINRA further warns that it is common practice for such promoters to use scare tactics to motivate the audience and to misrepresent the proposed investments as being safe, liquid vehicles that will produce high returns. Such promoters sometimes present false or misleading credentials, holding themselves out as “certified senior specialists” and the like, to gain the trust and cooperation of their audience.
The financial abuse of seniors with diminished mental capacity is another area of concern for regulators. An unpleasant fact of life is that, if we are fortunate enough to reach a certain age, our mental capacity does not improve and even begins to decline. This is separate and apart from dementia or Alzheimer’s disease. Recent studies have confirmed that a normal 60-year-old begins to lose knowledge about financial matters at a rate of 2% per year, while, at the same time, experiencing an increase in confidence in being financially knowledgeable. That is a dangerous combination, and one that is exploited by fraud promoters who prey on seniors.
Before investing, seniors should, at a minimum, verify through a state securities regulator that the brokerage firm and broker/adviser have the proper licenses and are registered to sell securities or investment products in the state, and that the investments themselves are registered. In addition, it would be wise to submit any proposed investment or investment strategy to an expert for an independent evaluation before investing.
Family members or persons who have a close personal or financial relationship with a senior, such as an accountant, should carefully monitor the senior’s investments, account statements and transaction documents to determine whether any red flags of fraud or abuse appear. Such red flags may include, without limitation, a lack of understanding by the senior of the nature of the investment; account statements that reflect unusual, illiquid, or risky investments (such as structured products, hedge funds, private offerings, etc.); high concentrations of particular securities or sectors, or excessive trading activity; “home-made” account statements from an independent or small broker-dealer; large losses or underperformance of an appropriate benchmark, such as the Vanguard Balanced Index Fund; cash balance with a negative number (indicating a margin balance); and unexpected withdrawals of cash, particularly by wire transfer.
If you or a loved one have investment losses or problems involving elder financial abuse, call the lawyers of Page Perry for experienced representation at (404) 567-4400 or (877) 673-0047 (toll free).