Financial exploitation of seniors is a widespread form of abuse that has seen significant increase over the past decade. A study from the Journal of General Internal Medicine found that one in every 20 elderly American adults is being financially exploited—as the large baby boomer demographic moves into senior citizen status, this number can only be expected to grow. According to a MetLife study, at least $2.9 billion will be lost annually to elder financial abuse. Despite the prevalence, many financial institutions do not have adequate compliance programs focused on combatting this issue. As financial custodians, broker-dealers and investment advisory firms have an obligation to recognize and report instances of exploitation. It is also critical to have extensive compliance policies and preemptive procedures in place, not only to address fraud when it occurs, but to prevent it from happening in the first place.

It is estimated that nearly 37 percent of elders experience financial abuse within any given five-year period. Worse yet, a report from the Los Angeles branch of adult protective services found that 90 percent of its cases involve abuse perpetrated by a trusted person in the adult’s life, including family members and caretakers. In fact, a survey from the Investor Protection Trust identified the top three financial exploitation problems for seniors as:

To address this, FINRA released new rule proposals in 2016 that allow advisors to pause orders for elderly clients if they believe exploitation is taking place. FINRA’s proposed rules and amendments are aimed at providing firms with ways to respond to situations in which they have a reasonable basis to believe that financial exploitation of vulnerable adults has occurred. These proposals will allow for a temporary hold on the disbursement of funds or securities as well as the ability to obtain the name of a trusted contact person to notify. Over 28 states have now enacted statutes that permit financial institutions to place holds or require mandatory reporting when instances of financial exploitation have been identified.

There are several things advisors can do to complement these industry-led efforts. Establishing protocols and relying on technology to systematically monitor accounts held by vulnerable investors are crucial preemptive measures that broker-dealers and advisors should be taking. Daily monitoring of transactions and analysis of accounts can be significantly valuable in proactively detecting peculiar or out-of-the-ordinary behaviors and actions, such as check numbers that are out of sequence, unusual increases in ATM or debit card activity or a rapid and sudden depletion of value or draw-down of cash.

Additionally, changes to an account that result in either a new or additional signatory, a new beneficial owner or the addition or change to a power-of-attorney must also be considered as a red flag. Systems should be able to survey transactions and detect instances such as a liquidation or surrender of a CD (certificate of deposit) without regard for surrender or maturity date penalties. Enhanced monitoring and heightened supervision should be established to keep track of all transactions and activities in the identified accounts held by elderly or vulnerable investors. Paying attention to these kinds of inconsistencies and making a concerted effort to be on the lookout can prove significantly helpful in preventing fraud before it happens.

 

On a larger scale, financial institutions should have extensive compliance policies in place to combat and report elderly financial abuse. Broker-dealers and investment advisors should conduct regular education sessions for brokers and advisors but also operational and support personnel so that every employee is able to recognize instances of exploitation.

And, it must be recognized that sometimes perpetrators come from within. Compliance and supervisory organizations at these financial firms should prevent brokers and advisors who have discretion, power-of-attorney or signing privileges on accounts of elderly or vulnerable investors. It is also crucial to establish clear protocols and procedures for reporting any instance of financial abuse to the firm’s compliance organization and branch supervisors, and it is just as critical to ensure advisors know and are following these procedures.

Even with all these regulations and efforts, when offenders do get apprehended, the consequences may not be enough. As much as Finra and the SEC’s Office of Compliance Inspections and Examinations actively prosecute, disbar and expel individuals found to be party to this type of fraud, the research indicates that instances of financial abuse are only increasing. Our industry may just not be disciplining its own offenders as hard as it should be, which is why it is essential to have processes in place from the start to ensure abuse does not happen. Innate checks and balances within financial institutions should be rigorous and effective enough to counter any potential exploitation, especially when it comes from trusted loved ones.

Financial institutions can play a significant role in detecting and preventing elder exploitation. It is not just crucial for advisors and firms to confirm their compliance—it is necessary to educate and ensure this trend is halted and that our laws and regulations are efficiently and successfully protecting our most vulnerable citizens.

Martin Orbach is the vice president of compliance solutions for DST.