As every financial advisor knows, the U.S. investing population is aging at a significant clip. It makes sense then that baby boomers account for the lion’s share of investable assets. And firms have made significant efforts to help these investors both grow and protect these assets. Despite these efforts, the federal government estimates that the costs of financial fraud against seniors exceed $2 billion annually.
Not surprisingly—given these numbers and the accompanying political clout wielded by seniors—regulators and legislators are keenly focused on protecting the elderly and other vulnerable clients from exploitation by third parties and unscrupulous investment professionals. On the legislative side, Congress recently passed the Senior Safe Act in an effort to spur financial firms to report concerns regarding possible financial exploitation of seniors. President Trump has signed the Act into law. Similarly, 13 states have adopted versions of the North American Securities Administrators Association’s Model Legislation or Regulation to Protect Vulnerable Adults from Financial Exploitation, which seeks to accomplish the same goal. On the regulatory side, the Financial Industry Regulatory Authority Inc. (Finra) has implemented Rule 2165, permitting member firms to place a temporary hold on disbursements from accounts upon a reasonable belief that financial exploitation “has occurred, is occurring, has been attempted or will be attempted.” Finra also amended Rule 4512 to require firms to make “reasonable efforts to obtain the name of and contact information for a trusted contact person upon the opening of a customer’s account.”
With the hyper-focus placed on protecting seniors, regulators and investor attorneys will undoubtedly devote time and effort to issues surrounding the aging financial advisor population. Firms should anticipate the same risk and compliance issues. Similar to the aging seen in the general and investor populations, so too are the ranks of investment professionals growing older. Consideration has been given to how this fact affects FAs’ relationships with their clients and how firms might seek to attract and develop younger and even millennial advisors, but it is also important to consider the ramifications that this development may have in firms’ efforts to comply with applicable regulations and standards of care.
Indeed, there are many physical changes that take place as we get older, including hearing loss and changes to vision. But physical changes are only part of the process. As the mind ages, many people experience memory loss and the ability to learn new things quickly. Some people face other mental changes such as the loss of reasoning abilities. These changes place firms in the difficult position of monitoring and taking action with regard to advisors who may not be in a position to properly advise and manage client assets. Firms must balance these concerns against the federal, state and local laws that protect against age discrimination. Without adequate safeguards that walk this tightrope of supervision and compliance, firms may find themselves facing regulatory or legal troubles on one side or the other.
Finra Rule 3110 establishes that it is the member’s responsibility to establish and maintain a supervision system to monitor the activities of each associated person. That system needs to account for not only aging investors but also aging advisors. As early as 2010, the SEC had issued guidance to firms on best practices for serving seniors. Those same best practices apply to serving and supervising senior advisors:
• Communicating Effectively With Investors And Advisors. Firms should communicate with investors and make sure they are aware of the need to monitor their accounts and report potential unauthorized activity. Firms should also communicate with advisors and provide information on the standard of care as well as the need for succession and business continuity plans.
• Training On Senior Specific Issues. Although firms have generally provided training on issues that are unique to older clients, firms should consider providing training on the potential issues that may arise with aging advisors. Topics could include practices to keep your mind sharp and warning signs to be aware of that may need reporting.
• Establishing An Internal Process For Escalating Issues. Advisors need to have some assurance that reporting (or self-reporting) will be handled appropriately. Firms should make sure advisors have a central point of contact to report potentially harmful behavior.
• Conducting Supervision, Surveillance and Compliance Reviews. This best practice should already be in place to monitor and capture transactions and practices that need further investigation.
Firms that take these steps will be in a better position to remain in compliance with the new laws and regulations relating to seniors as they relate to both aging investors and also advisors.