Financial exploitation, particularly committed against the elderly, is a large and growing problem with an estimated cost of between $3.5 billion to $5 billion each year, said Randy Kemnitz, subject matter expert at the Kaplan School of Professional and Continuing Education. Kemnitz spoke about financial exploitation and how to spot it at the National Association of Independent Life Brokerage Agencies annual conference last week in Dallas.
The median amount of loss associated with financial exploitation is $50,000 today, said Kemnitz. With a growing population over the age of 65, which is expected to double by 2040 to 88.5 million people. The problem is likely to get worse, especially as older populations tend to have a higher net worth. Today, people over the age of 65 have an estimated net worth in excess of $20 trillion.
Compounding the problem is the reality of cognitive declines as we age. People lose about 25 percent of their cognitive ability — including short-term and long-term memory, and math and language skills — between the ages of 65 and 85, Kemnitz said. This cognitive loss makes elderly populations a vulnerable target for financial exploitation.
Up to 10 percent of the over-65 population has been subject to financial exploitation at some point, and three-quarters of certified financial planners report that a client or family member has been financially exploited. In all cases of senior abuse reported, only one in 10 do not involve financial exploitation, and only one in 14 actual cases of financial exploitation are reported due to embarrassment or fear of admitting to diminished cognitive ability, Kemnitz said.
What is financial exploitation?
Financial exploitation occurs when a person misuses or takes the assets of a vulnerable adult for their own personal use. Sometimes this happens without the knowledge or consent of the victim. Common methods employed in exploitation schemes are deception, false pretenses, coercion, harassment, duress or threats.
Kemnitz drew a distinction between the vulnerability of impaired adults vs. adults with diminished capacity. An impairment is considered a temporary condition that reduces decision making capability through substance abuse or other conditions. Diminished capacity is more prevalent in elderly populations but is not exclusive to them. The decline of skills can also occur with neurodegenerative disease or dementia.
“Given that diminished capacity greatly impairs one’s ability to make financial decisions, its detection is critical to protecting older clients from financial harm,” Kemnitz said.
Financial exploitation is classified into two categories: exploitation by a person known to the victim and exploitation by a stranger. In the case of a known person, exploitation may occur by obtaining money through undue influence, coercion into relinquishing assets, improper use of power of attorney or fiduciary authority or fraudulently altering a person’s will.
Exploitation perpetrated by a stranger often involves misrepresenting an institution to elicit help from the victim, pigeon drop schemes in which the perpetrator claims to have found money and offers to split it with the victim, false claims of harm to the victim’s family, telemarketing and mail fraud, nonexistent prize notifications and unsolicited work with escalating fees.
Beware of these warning signs that financial exploitation might be happening to your client, including unusual bank transactions. (Photo: iStock)
To help your clients avoid becoming a victim to financial exploitation, there are several red flags to watch out for including:
- Abrupt increases in withdrawals
- New spending patterns following the addition of a new authorized user
- Atypical withdrawals
- Unusual gaps in documentation such as check numbers
- Transactions inconsistent with the client’s goals
- Address changes followed by account changes
- New third parties speaking for the older adult
- Confusion or lack of awareness of account changes
- Requests to send account statements to a third party’s address
- Behavioral changes such as increased distress or changes in hygiene
- Mentions of lottery or sweepstakes opportunities or winnings
- Inquiries about international wire transfers
- The appearance of new friends advising them on their finances
- Inability to process or understand basic concepts
- Inability to articulate questions or concerns
What can you do?
If you suspect financial exploitation is at play with one of your clients, Kemnitz recommends investigating your state’s statutes and laws as well as resources. In some cases, you could be criminally and civilly responsible to report suspected financial exploitation.
Adult protective services and long-term-care ombudsmen can also be a good resource to help advisors navigate the tricky process of investigating and reporting elder financial abuse.
In addition, training all employees to recognize these signs can keep the company out of trouble and help combat exploitation among clients.
Several important client-facing steps can also add protection against exploitation, including requiring third-party consents and opt-in procedures that add layers of protection when account information is changed. Careful documentation can not only help uncover trends that may point to an exploitation but also demonstrate the company has taken every possible step to protect their client.
Finally, suspected financial exploitation should be reported to authorities, including state agencies, local police, the FBI and the Financial Crimes Enforcement Network (FinCEN).
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