With more and more seniors losing their savings to fraudsters, regulators say advisors have both a professional obligation and financial incentives to protect elderly clients.

Representatives of the Securities and Exchange Commission, the Financial Industry Regulatory Authority and other agencies attended a virtual meeting held on Nov. 3 by the North American Securities Administrators Association to discuss their work to protect the elderly from fraud and deceitful practices. Jim Wrona, vice president and associate general counsel of FINRA — an industry group that self-regulates broker-dealers — said advisors and other professionals should be concerned about fraud not only because it's the right thing to do; there's also their interest in making sure elderly people's money isn't drained out of the financial system.

“There is an incentive to maintain these assets,” Wrona said. “We don't want them stolen by fraudsters. Of course, the concern, it's also genuine.”

According to investment management company Vanguard Group's “How American Saves 2022” report, the roughly 54 million Americans who are 65 or older — old enough to enroll in Medicare — had an average of $283,439 in savings in 401(k) and individual retirement accounts in 2021. The U.S. Census Bureau projects that one out of five Americans will be old enough to retire by 2030.

Recent figures suggest this will be a population particularly susceptible to fraud. The Federal Trade Commission, which enforces consumer protection laws, reported on Oct. 18 that elderly Americans lost $147 million to investment scams in 2021, a figure up 213% from the year before. The Consumer Financial Protection Bureau has reported that Americans aged 70 and older lost $71,800 on average to exploitative practices between 2013 and 2017. And because underreporting is believed to be widespread, the actual losses are estimated to stretch into the billions of dollars a year. 

Anne Mank, the director of financial planning at Rockford, Illinois-based Savant Wealth Management, said she and her colleagues see their fair share of clients coming in to ask about questionable emails or to report that they had responded to something that maybe they shouldn't have. She said advisors at Savant are trained to look for warning signs. Fraud isn't always involved. An advisor might have reason to raise questions about mental competency if a client, say, seeks to take $10,000 out of account without seeming to remember having done the same thing the day before.

“Or if our client is asking for $50,000 and they had previously talked about how they weren't going to take money out this year, you can at least ask: Why are you going to do that?” Mank said.

She acknowledged that clients have final say over their money. Financial professionals, though, do have some means at their disposal to try at least to mitigate harm. She said advisors should be encouraging clients to take advantage of a FINRA rule that allows them to designate another person – often a relative — as a “trusted contact” who can be informed of any suspect activity involving an account. Mank said advisors are not allowed to share financial information with such a person unless he has been designated a power-of-attorney. But they can at least check in to see if anything is amiss and if further steps are warranted.

“If we don't have that trusted contact, it is very hard to stop something when it's started,” Mank said.

Fiduciary duty?
Although most advisors are likely to feel an ethical obligation to protect elderly clients from fraud, it's not so clear that they are bound to do so by their fiduciary duties. Knut Ronstad, the president of the Institute for the Fiduciary Standard, a research institute, said the fiduciary responsibility calling on advisors to place clients' interests mainly applies to the relationship between an advisor and a client. So the water gets murky when fraud is being perpetrated by someone outside that relationship.

“Of course, if you're working with Mr. Smith, who's 90, and you see from his accounts that funds are going somewhere and you have no idea where, and Mr. Smith himself can't explain, there is definitely an ethical obligation to do something,” Ronstad said. “But, in that scenario, there's a big question if that's part of your fiduciary obligation.” 

Widespread underreporting
The FTC found in its latest report that not only are older Americans less likely than young ones to report incidents of likely fraud; they are more likely to report the loss of larger sums when they do go to the authorities.

Richard Szuch, the chairman of senior issues and diminished capacity committee at NASAA — which represents state regulators through the U.S. — said elderly investors can be hesitant to come forward. Many fear they'll be made to feel foolish or that they'll be deprived, perhaps by concerned relatives, of control over their money. FINRA and the AARP released a report in June calling on regulators to avoid words like “duped” and phrases like “you fell for it” when dealing with suspected cases of elderly fraud. 

“I think we all know now that blaming and shaming people is not the best way to treat people who are in a bad spot,” he said.

Pig butchering
With the COVID-19 pandemic having left many people feeling lonely and isolated, the elderly were particularly susceptible to scams involving faked romantic interest. Many of these schemes also have a tie to cryptocurrency or other often poorly understood investment opportunities. One type of scam, known as “pig butchering,” involves enticing a person — usually by text message — to invest in a fake crypto exchange. Returns are provided in the early days to “fatten up” the intended victim up and induce them to keep putting in more money, which is eventually siphoned off.

NASAA warned in its 2022 Enforcement Report, released in September, that investigations into securities schemes tied to digital assets had increased by 70% over the two previous years. The report notes that 34 states have adopted its Model Act to Protect Vulnerable Adults from Financial Exploitation, which provides for a consistent system of reporting incidents of suspected fraud. Using that rule, NASAA members reported 1,428 cases of suspected exploitation in 2021. That was an increase of 35% from 2020 and 118% from 2019. Those latest reports led to the opening of 356 investigations, an increase of 20% from the year before, and 54 enforcement actions. Among those investigations, 281 involved products that, like cryptocurrency, aren't registered with the SEC. 

Suzanne McGovern, a senior advisor at the SEC, said there has also been a rise in scams involving self-directed IRAs. These plans, unlike most standard IRAS, allow participants to put money into alternative investments like real estate, mortgages and precious metals. The tradeoff is that they're under less regulatory scrutiny. McGovern said the SEC investigated one case in which fraudsters were able to defraud a participant in a self-directed IRA of $450,000.

Ways to prevent fraud
Wrona said there are a number of steps advisors and other financial professionals should be taking to prevent and mitigate fraud. One is to simply stay in touch regularly with their colleagues and let them know of any new scams they might have read about or even encountered in their own work with clients. 

And clients who haven't designated a trusted contact should be encouraged at every opportunity to do so. Of course, Wrona conceded, the rule does little good at times when the person designated as the trusted contact is also the person perpetrating the fraud. That's where advisors have to be careful and use their judgment, he said. 

“It really is common sense,” Wrona said. “If you suspect the trusted contact is involved, then you don't use it.”

The SEC also approved a rule in January allowing advisors to place holds on accounts held by people who are 65 or older or who have disabilities to prevent disbursements for 25 days at times when there are suspicions of fraud. The holds can be extended by 30 days if an advisor has reported the suspect activity to the federal or state regulators.

Szuch noted that NASAA and state regulators offer training initiatives such as the Senior$afe program to teach advisors how to recognize and prevent elderly fraud.

“Put in a little bit of time,” he said. “Because a little bit of training goes a long, long way.”

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