Markets In Action

How the financial industry is stepping up to protect senior investors in 2018

U.S. seniors lose at least $2.9 billion each year to fraud and exploitation, with an estimated one in five seniors victimized by financial abuse annually, according to a 2011 study by MetLife. Those disturbingly high numbers understate the true scope of the losses in elder financial abuse cases, due to under-reporting by victims, experts say.

“Despite growing public awareness from a parade of high-profile financial abuse victims, [financial exploitation of seniors] remains underreported, under-recognized, and under-prosecuted,” the MetLife study found.

Worse yet, as the number of Americans aged 65 and over continues to grow, the total losses from financial exploitation of senior investors can only be expected to skyrocket.

To counter this troubling trend, financial industry leaders have sought to expand the range of tools available to combat the exploitation of vulnerable seniors. That campaign takes a significant step forward in February 2018, as new rules take effect to make it easier for financial broker-dealers to prevent elder financial abuse before it happens.

Two updated rules from the Financial Industry Regulatory Authority (FINRA), the industry’s leading self-regulation entity, strengthen brokers’ ability to respond to potential acts of fraud, abuse and exploitation before losses occur. The new rules, approved by the Securities and Exchange Commission last year which took effect February 5, are as follows:

The “trusted contact” rule. The first rule, which amends the previously existing FINRA Rule 4512, requires brokers to request the name of a trusted contact, such as a family member, close friend, or professional advisor, to be listed on the investor’s brokerage account. In the event of suspected financial abuse, or if the client is believed to be ill or suffering from cognitive decline, the broker then has an alternative point of contact who can check in on the client. The trusted contact designation is voluntary for the client, but the broker is required to ask for a contact listing.

The “report and hold” rule. FINRA Rule 2165 is a new regulatory provision that allows the broker to place a 15-day hold on disbursements from a client’s account in the event of suspected financial exploitation. This “safe harbor” time period allows the firm to investigate and confirm the legitimacy of the transaction, before the funds leave the client’s account. If criminal abuse is revealed, the firm may contact law enforcement or other state authorities to provide additional assistance in protecting the client.

Jim Wrona, vice president and associate general counsel for FINRA, emphasizes that the rules are intended to allow financial professionals to be more forward-leaning in addressing abuse and exploitation before clients are victimized.

“We want to be proactive in addressing elder abuse or exploitation and these are the two biggest issues that keep coming up when we talk to brokers,” Wrona told Financial Advisor Online in December 2017. “FINRA has been at the forefront of addressing issues of elder financial abuse and we will continue to look at the problem to see what can be done.”

The National Adult Protective Services Association (NAPSA) defines “financial exploitation” as “when a person misuses or takes the assets of a vulnerable adult for his/her own personal benefit,” frequently without the knowledge or consent of the victim.

The perpetrator may use deception, false pretenses, coercion, harassment, duress and threats to carry out the abuse. Such exploitation encompasses a wide range of fraud and abuse, including investment and real estate fraud, e-mail and phishing scams, lottery scams, outright theft and more.

And while most financial exploitation (51% of reported instances) is perpetrated by strangers to the victim, more than one-third of the reported cases (34%) involved perpetrators close to the victim—a friend, neighbor, family member or trusted caretaker, according to the 2011 MetLife study.

Like FINRA, the Securities Industry and Financial Markets Association (SIFMA) has stood at the forefront of the fight against senior financial exploitation and abuse. SIFMA, on behalf of its members, lent its advocacy weight to the effort to move the new rules forward.

SIFMA Managing Director and Associate General Counsel Lisa Bleier emphasized that the new FINRA rules protecting seniors are welcome, but noted that they are only a first step toward addressing systemic abuse of seniors. Further changes need to follow, Bleier suggested.

“Hopefully the rules could apply to [registered investment advisors] through the Securities and Exchange Commission and banking institutions at some point in the future,” Bleier told Financial Advisor Online. “Also, the ability to put a hold on accounts applies to disbursements only, not to transfers from one account to another. It also would be a good proposal in the future if banks could speak to one another when fraud is suspected.”

Finally, remember that the first and most important line of defense against elder financial abuse begins at home. If you have aging family members, friends or neighbors whom you fear may be vulnerable, talk to them in advance about the dangers of financial abuse and exploitation, and how to prevent becoming a victim, before they’re subject to a potential financial disaster. If you’re not sure how to get that conversation started, check out our earlier Project Invested guide to talking to your aging loved ones for tips on improving communication about money matters.


Additional resources

FINRA’s securities helpline for seniors: A helpful toll-free resource for seniors who have questions about their brokerage accounts or believe they may be receiving unfair treatment from their investment firm.

SIFMA’s Senior Investor Protection Toolkit: Financial professionals and firms should check out SIFMA’s comprehensive package of senior investor protection materials, specially designed to help you protect and serve your senior clients more effectively.