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 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.


Elder Financial Abuse-the Fiduciary Rule and Broker/Dealer compliance.

There are two general rules in the financial markets that you should never forget: 1) the higher the yield or growth potential for any investment the higher the risk of loss, and 2) investments that have a higher risk frequently pay a higher commission to the stockbrokers who sell them.

Seniors and retirees often want to draw as much as possible from their retirement accounts every month. Stock brokers are constantly tempted to give the customers what they want (higher yields) because it puts more money in their own pockets at the same time. The end result is that a lot of seniors are steered into making investments that are riskier than they wanted or could afford.

To address this temptation head on, the Securities and Exchange Commission (SEC) has proposed a new standard of conduct for all stockbrokers. The SEC’s proposed rule states:
“The standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.”

Although Registered Investment Advisers have lived and prospered under this “fiduciary” standard for decades, the financial services industry has organized an effort to assure that this standard will not apply to most stock brokers. This rule squarely hits the industry’s bottom line.

The rule is very much the result of many years of seniors being steered into riskier investments to increase the industry’s profits. In May 2015 the staff of the SEC and FINRA published a joint report of their examination of brokerage firms selling investments to seniors. The staff asked firms to provide a list of the top revenue-generating securities purchased by their senior investors by dollar amount.

Variable annuities were among the top revenue generating financial products sold to seniors at 68% of the firms examined. Non-traded REITs, alternative investments such as options, leveraged inverse ETFs and structured products made the list at between 10% and 20 % of the firms.

A variable annuity usually comes with a significantly higher than average commission to the salesperson. While variable annuities do offer tax deferrals and other benefits that might be attractive to some investors, no one disputes that variable annuities are high cost, high risk and high commission products. It is no secret that the high load and withdrawal charges that can go on for years make variable annuities less suitable for investors as they get older.

All stock brokerage firms are required to have procedures in place where managers officially supervise all employees. As part of their supervisory efforts, most firms employ a compliance department, usually populated by professionals tasked with the supervision of every account on the firms’ books and every order that the firm handles.

Most compliance departments compile daily exception reports of the previous days’ trades that were uncharacteristic or fit within pre-determined parameters as potential problems. It is much easier to fix problems with trades before the settlement date.

There should be a similar system that would identify the sale of a variable annuity to a 70 year old retiree as outside the norm of expected behavior. If the surrender charges extend out for 10 years, the customer’s access to his own money is restricted until the customer is 80 years old. Throughout, the investment portfolio will be exposed to market risk. Often the customer could substitute a mutual fund or funds for the same investment purpose at much less cost.

Where surrender charges extend out for ten years it often means that the sales commission on this transaction might be a high as 10%. That is why the SEC’s proposed rule focuses upon the “financial or other interest of the broker”.

The industry firms sell more and more variable annuities each year and make a lot of money doing so. I am certain that their shareholders expect nothing less. If you have been thinking about the “Fiduciary Rule” debate on a philosophical level, this is where the regulation meets the cash register.

The risk tolerance of each customer, for each transaction, is considered by the stock broker, the supervisor, and the compliance department. An investor’s risk tolerance can be easily ascertained with the question: how much of the money that you are investing are you prepared or willing to lose?

Many non-traded REITS began their lives as private placements issued under Regulation D. Once you buy them, selling them can be very difficult if not impossible. If the market turns against you, you have to ride the investment all the way down. In 2008-2009 many non-traded real estate investments lost significant value or went bankrupt. An investor in a non-traded REIT can often suffer a total loss.

Again, the SEC is keenly aware that these private placements often pay very high sales commissions. The SEC also knows that there are a multitude of comparable REITs that are liquid because they trade in the public markets and can be bought or sold for normal brokerage commissions and on any day the markets are open for trading.

Is it fair, then, to ask why a professional compliance department would not think it odd that a great many seniors seem willing to invest large amounts in clearly speculative investments when similar investments are readily available with much less risk and much less cost? Can the industry make a plausible argument that higher commissions do not drive these sales?

The industry is fighting for the right to set commissions at levels it deems fit without due consideration of whether the extra cost makes any sense from the investors’ point of view. Adopting this rule should lower commissions and customers costs overall and promote market efficiency. Diverting seniors to safer, less expensive products at the same time cannot be anything but positive.