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:
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Theft or diversion of funds or property by family members (79 percent)
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Theft or diversion of funds or property by caregivers (49 percent)
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Financial scans perpetrated by strangers (47 percent)
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.