Wall Street Is Failing to Protect Seniors From Fraud, Say Regulators

Financial companies appear to be failing senior investors.

At a time when senior financial fraud is on the rise, financial regulators say those on the first line of defense—brokerages and financial advisors—aren’t doing enough to stop it, according to a recent survey fielded by the North American Securities Administrators Association.

About three out of four state securities regulators say they do not believe the financial industry is doing enough to prevent senior financial fraud, according to the survey. Perhaps even more alarming: Of the cases that do get reported, an overwhelming majority of regulators (97%) say that the abuses have gone undetected far too long.

Such delays can be devastating to seniors, who are usually retired and drawing on their accumulated lifetime savings, rather than bringing in money. And the amounts at stake can be substantial. In Virginia alone, financial exploitation robs victims of an estimated $1.2 billion a year, according to the state's Department for Aging and Rehabilitative Services.

“Early detection and reporting are critical,” says NASAA's president, Mike Rothman. Unlike younger investors, seniors do not have the luxury of time to recoup losses inflicted by financial exploitation, he says, so catching and stopping the fraud early could be the difference between having enough money to live on or not.

It’s not just regulators pointing fingers. In a survey of over 60 broker-dealers in June, about 70% said they didn’t have any policies in place that were specifically tailored to seniors. And less than half said they have developed a form for customers to identify an emergency or trusted contact to be used in case the senior investor becomes incapacitated—a procedure the industry considers a critical step for protecting vulnerable customers.

“Many firms need to put all the pieces together,” Rothman said.

That's especially true when it comes to reporting elder fraud. NASAA found in the June survey that while firms reported suspected cases of senior financial fraud to adult protective services about 62% of the time, they only reported the cases to local law enforcement 4% of the time—and less than 1% of the time to state securities regulators.

In many cases, it's up to investors and their networks of friends and family members to protect themselves. Caregivers should monitor new relationships, Rothman says, adding that early warning signs could be new “friends” who show excessive interest in an individual's finances or accounts.

Another red flag for friends and family: any abrupt changes to financial documents, such as power of attorney, account beneficiaries, wills, trusts, property titles, and deeds. That's especially true if a new caretaker, relative or friend suddenly begins conducting financial transactions on behalf of a senior.

Part of helping senior investors is also keeping up with changes to the rules and regulations, as they can differ state to state. And there has been some improvement toward getting more protections put in place. About half of state securities agencies have started to implement newly established rules requiring financial advisors who suspect fraud to report it. About 13 states— Alabama, Arkansas, Colorado, Indiana, Louisiana, Maryland, Mississippi, Montana, New Mexico, North Dakota, Oregon, Texas and Vermont—have actually put the new rules into effect, while many others continue to work on enacting similar legislation.

And a new industry rule going into effect next February will require brokerage firms to ask all customers for the name of a trusted contact who can act as a resource when a financial advisor suspects that the client's mental faculties have declined. That rule will also allow brokerage firms to delay fund transfers when they suspect financial exploitation—giving the firms time to investigate a situation and contact the client, the trusted contact, and even law enforcement if appropriate. This is crucial because it's almost impossible to recover the funds once they're in the hands of a fraudster.

On the federal level, Senators Susan Collins (R-Maine) and Claire McCaskill (D-Mo.) introduced the Senior$afe Act in January. While the bill contains numerous provisions aimed at protecting seniors from fraud, there has been little movement to push it through Congress, and Skopos Labs estimates there's only about a 5% chance of it being enacted.

Yet Rothman says it's legislation like this that would help bolster existing protections. “The bill calls for greater training of financial institutions and professionals on how to identify and report suspected exploitation of a senior citizen,” he says.

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Wall Street Is Failing to Protect Seniors From Fraud, Say Regulators