Stopping Elder Financial Abuse

What happens to retirees in the financial markets is a national disgrace. It was so in 2015 when I wrote a book on the subject (the one with the shark on the cover in the right margin of this blog). It is still available on Amazon.com and I still give the proceeds that I receive to cancer research. Little has changed since…but it could.

Retirees who have been fortunate enough to put away $500,000 or more to cover their retirement expenses know that very few of their contemporary baby-boomers will have as much.

Much of the discussion about elder fraud centers on caregivers or relatives who help themselves to a senior’s checkbook. To a lesser extent, it is about educating seniors to avoid scam artists, phony charities and telemarketers.

Very little time or money is spent focusing on how the mainstream financial industry acts to rip off seniors and retirees. I suspect this may be because many of the not-for-profit organizations that are active in this area also count banks and mainstream financial firms among their donors and advisors.

The financial services industry offers no real training for financial professionals on how to spot cognitive impairment in potential customers who are senior citizens. The general attitude of the industry towards seniors is that if they have money and want to invest then the financial services industry is here to assist them.

Most retirees (and most investors) purchase the investments that their brokers or advisors recommend. We acknowledge that financial professionals know more about the financial markets and about any particular investment that they are recommending than we do.

Post-retirement investing is not that complicated. For most people it is absolutely essential that they get it right. For everyone, it should be absolutely essential that they do not get it very wrong.The person from whom you seek financial advice is the key person who will be responsible for determining exactly how much money you will have to spend between the time that you retire and the time that you die.

Unfortunately, there is a lot of bad information about the cost of retirement living that is built into many retirement planning models. The financial services industry is the source of much of this misinformation which skews the conversation about investing retirement funds and has become imbedded in the mainstream mindset.

For example, standard retirement calculators will tell you that inflation is a big problem for anyone on a fixed income. They suggest that a retiree’s expenses will continue to grow, year after year until they die, even if they live into their 90s.

Actually, studies show that most retirees spend less each year after a certain age as they slow down. In many cases, there is no need to take on the risk to try to make the portfolio continue to grow and grow.

Whether or not you will need long-term care and for how long is much more likely to impact your retirement lifestyle and retirement finances than anything else. Many people consider long term care insurance but you will only have a conversation about it if the financial professional whom you consult has an appropriate license to sell it to you.

Retirees frequently hear a sales pitch that seems pretty benign. Retirees are told that they can get a dependable monthly or quarterly check at a rate several percentage points higher than they might get if they kept their money in a bank or if they invested their money in bonds. The risks are often minimized, if they are considered at all.

Actual portfolio construction for a retired income investor is neither difficult nor complicated. If you need to draw a check from the account every month or every quarter, any competent financial professional should be able to help you earn anywhere between 4% (with less risk) and 8% (with more risk) per year. You should be able to peg your return with a high degree of specificity.

Investments and strategies that pay a higher return to investors generally have a higher risk of loss. Investments and strategies that have a higher risk of loss generally pay higher commissions and fees to the financial professionals who sell them.

There are no secrets here. The financial services industry, its regulators and just about every stockbroker who sells them knows that two financial products in particular, private placements and variable annuities, are too risky and inappropriate for most senior investors. These two products pay among the highest commissions of any products that a stockbroker can offer.

Even traditional asset allocation ideas are suspect given that the government has artificially reduced interest rates for so long. Many retirees are sold “high yield” or junk bond funds because the interest rates and therefore the distributions are higher.

But there is a reason that they call junk bonds “junk”. It is because the risk that they will default is higher. If they do default investors lose their investment.

All bond funds are a problem when interest rates are rising as they are now. If you have bond funds in your portfolio and your advisor has not advised you to sell them and purchase higher rated individual bonds, it is because your advisor is lazy.

There is an old saying that a rising tide raises all boats. When this market turns down (and they always have in the past) many seniors will have losses that they never expected to have. It is often because they took risks that they never intended to take.

The typical retort of the financial services industry is always the same, that they did not see the downturn coming.  Actually, it is not that they do not see it coming; it is that they do not want to see it. A market down turn is bad for business and stockbrokers seem to think that something as simple as a stop loss is too difficult to apply.

The simple fix for this vexing problem is for the compliance departments at the brokerage firms to start acting like they want to fix it. People nearing retirement age should not be permitted to purchase variable annuities or private placements unless they can afford to lose the money that they are investing. That fact should be verified before the order for one of these products is processed. This is one area where a little common sense and effort will go a long way and could help a lot a seniors avoid significant financial problems.

 

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