FINRA Takes Aim at Senior Investor Financial Exploitation
The Financial Industry Regulatory Authority (FINRA) is taking new steps to address a longstanding problem: the financial exploitation of seniors.
U.S. residents aged 65 and over control a large share of the country’s total investable assets. Senior investors’ wealth, among other factors, makes them a target for financial abuse and exploitation. But surprisingly, knowledgeable investors may be victimized more than the financially illiterate.
1 in 5 seniors have been the victim of financial fraud.
To better protect seniors, FINRA has implemented a new rule that permits financial advisers to place a temporary hold on potentially fraudulent account transactions.
While FINRA’s actions are a step in the right direction, they still do not fully protect seniors from exploitation. And when fraud does occur, the victim—not FINRA or the brokerage firm—must prosecute the alleged offenders.
If you have been the victim of investment fraud, contact the Business Trial Group for a free case review.
Financial Exploitation of Seniors a Growing Problem
Baby boomers (those born between 1946 and 1964), who control about 50 percent of the total investable U.S. assets, are reaching retirement age. By the year 2050, the number of persons 65 or older is expected to increase from 41 million to 86 million.
An estimated 1 in 5 Americans aged 65 and over have been the victim of financial fraud. As the U.S. population ages, financial exploitation of seniors will only be a more serious problem.
Financial exploitation is the most common type of elder abuse. It is also is widely underreported, making the true scope of the problem difficult to assess.
Certain Factors Put Seniors at Risk
Seniors, especially those looking to supplement fixed incomes with non-traditional investments, may be particularly vulnerable to certain financial schemes, including schemes that evoke strong emotions.
According to a study from the Stanford Center on Longevity, evoking strong emotions increased senior participants’ susceptibility to fraud significantly more than it did younger adults’ susceptibility. Con artists might capitalize on this tendency by employing tactics meant to make older investors excited or angry and suspend their rational thinking.
Other factors fueling the financial vulnerability of seniors include:
- Market volatility
- Plummeting value of retirement assets
- The shift away from employer-based pensions to employee-controlled accounts
- Taking risks on unregulated investments
- Unsolicited investment pitches (through phone, email, or social media)
- Making five or more investment decisions in a year
- Attending “free lunch” investment seminars
- Cognitive decline
However, the stereotype of a befuddled, uniformed senior falling prey to fraud isn’t necessarily accurate. FINRA research has found that the financially-literate are more likely to be fraud victims. Compared to non-victims, fraud victims also tend to be optimistic, reliant on their own financial knowledge, and experience more negative life events (such as financial distress).
FINRA Adds Rule 2165, Amends Rule 4512
Even the most level-headed investor can get caught up in a con artist’s scheme. A financial adviser may be able to spot fraud better than a client, which is why FINRA armed brokers with new powers to intercede on behalf of potential fraud victims.
FINRA Rule 2165 permits an adviser to temporarily place a hold on the disbursement of funds or securities from a “specified adult” customer account when there is a reasonable belief that the customer has been financially exploited, is being exploited, or if exploitation has been attempted or will be attempted.
The new FINRA rules take effect in February 2018.
The “specified adult” may be either a person aged 65 or older or a person aged 18 or older who the financial professional reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.
Accompanying amendments to FINRA Rule 4512 require advisers to keep a record of the name and contact information of a senior’s “trusted contact” who can be reached in the event of suspected financial fraud or abuse.
Both rules take effect in February 2018.
Critics have pointed out that Rule 2165 only “allows” (and does not “require”) the financial professional to place a temporary hold on a disbursement of funds or securities when financial exploitation is suspected. There is also no requirement for the adviser to report the suspected financial abuse to the Securities and Exchange Commission (SEC) or adult protective services.
Financial Advisers Have Additional Obligations
Senior investors’ financial goals can differ significantly from younger investors’ goals.
Advisers must only recommend those investments that are “suitable” for senior investors based on their investment profile. However, FINRA reports that more than one-third of advisers make potentially unsuitable recommendations.
Unsuitable investment advice is just one of many types of financial misconduct that can be perpetrated by brokers and firms. At some firms, more than 15% of advisers have misconduct records. Broker misconduct costs investors hundreds of millions of dollars per year.
Florida’s Strong Senior Protections
The State of Florida, which leads the nation in percentage of senior citizens, has some of the country’s strongest legal protections against senior financial exploitation. Under Florida law, a vulnerable adult who is financially exploited may file a lawsuit to recover damages as well as attorney fees.
Attorney fees may be recoverable in some cases.
Vulnerable adult is a wide-ranging designation that covers all seniors with physical, mental, emotional, or age-related impairments. Exploitation includes breaches of a fiduciary relationship, such as the breach of an investment professional’s duty to put their client’s interests ahead of their own.
When a senior citizen has been the victim of financial exploitation, it is important to consult an attorney to analyze potential claims that may be brought under Florida’s elder abuse statutes.
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