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15 best practices to protect clients from elder financial fraud

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Charleston — The IRI Annual Meeting — and, no doubt, other conferences within this industry — had a heavy focus not only on the importance of retirement planning and the proposed DOL fiduciary standard, but also on elder financial fraud. 

With the U.S. population aging at a rate never before seen, cases of elder financial fraud are skyrocketing. To speak on the subject, a panel of industry figures assembled at the IRI Annual Meeting, including:

  • Thomas M. Mierswa, Jr. Esq., executive director, branch advisory group and compliance division, Morgan Stanley Wealth Management (moderator)

  • Jamie Cox, managing partner, Harris Financial Group (panelist)

  • Wendy Johnson, assistant vice president, conflict resolution, department of compliance, U.S. Bancorp Investments (panelist) 

Below is an excerpt of what was discussed:

Thomas Mierswa: We see it all too often: someone who is being financially exploited who is suffering from diminished capacity.

Jamie Cox: A lot of it’s left up to us; it’s up to us to know our clients. As an on-the-ground person, it’s very difficult to understand what to do [in situations like that]. Who do you call? Does the situation rise to the level of financial exploitation or elder abuse? From us, we really need training and advice from our legal and compliance folks. We have 10,000 people turning 65 every day in this country. The volume of clients we deal with makes it difficult to know every detail of each one.

Wendi Johnson: Any time a rep has a concern, we don’t ask them to make end decisions. We look at it — look at their client’s accounts and trading and banking activity. We also work closely with our corporate security division if we have concerns about what’s happening in other firms [the client does business with]. We can work with Adult Protective Services or law enforcement if there’s any merit as to what’s being brought to us. We try to bring the families in as well.

Mierswa: We find it helps to have a common set of rules. FINRA and other states are looking into this. One of the biggest concerns we have is the “lone ranger” scenario, where an experienced rep thinks they can handle it themselves and tries to. It could bring many ramifications — a lot of legal liability. Washington state, Missouri and Delaware have passed laws against elder abuse.

Cox: A lot of reps are very territorial and sometimes they’re afraid they’ll lose accounts if they bring something up regarding elder fraud. You have to first get the reps to recognize their responsiblity to the client. As the population ages, reps need to get prepared, starting today.

Mierswa: It’s an extension of doing what’s right for the client. It’s the need to educate the advisor population. How does U.S. Bancorp do that?

Johnson: We go out to the field. I do a lot of calls and training and I think it’s important to foster that collaborative relationship. Historically, compliance is not the favorite of the field. But we want to let them know we’re partnering with them. We understand that a lot of what we do [as compliance] does not generate revenue, but it needs to be done.

We never have a rep make a call to authorities. I do that. The rep should focus on their relationship with the client and that’s why I handle the call. I’m looking to protect the client and protect the rep’s business and career. That alleviates the anxiety the rep may have.

Mierswa: The training is important. We also put together a website so reps can consult the information there. We have both internal resources and external resources. We also have periodic meetings, where the training is constant. It’s very important to do that. We don’t expect employees to be experts in diseases that diminish the mind. If you sense something going on, bring it up to your risk manager or compliance. Work with someone to get the client assistance.

Here are some real life examples:

Scenario No. 1:

  • Senior client tells her FA that she received an email advising her she had won $250,000 in a lottery and that she needs to wire $25,000 to a bank in the Cayman Islands to claim her prize. Client forwards the email to the FA.

  • FA advises the client that it is a scam, and the client does not wire funds out of her brokerage account. FA makes a day-timer note but does not alert management.

  • Two months later, the client requests a wire for $50,000 to her personal bank account.

  • FA questions the client on the reason she needs the funds. The client makes the FA promise to keep her information confidential and discloses that she has been receiving threatening phone calls because she has not wired the funds to the Caymans. 

Mierswa: Internet scams. Our clients are getting pummeled with this. This is a real situation. This is typical — every DAY we get something like this. 

Cox: The problem is blindness of us. Unless it’s a large number, we don’t typically notice it. It’s usually at the end of the line, when a large sum is taken out [that we notice something not right]. It’s difficult.

Scenario No. 2:

  • A senior client has been with the firm for several years and was widowed three years ago, comes into the branch and requests $75,000.

  • The client is evasive when the FA inquires about what the funds are for, but states she needs to lend a friend some money.

  • The FA presses the client for additional information. The client finally discloses that she has a “friend” who needs the money to obtain an inheritance from his deceased wife’s family wealth in a foreign country.

Johnson: She came in and wanted $75,000. She said money was going to a friend who received an inheritance from his Malaysian wife. Finally, the advisor refused to do the transaction for her. And the branch manager refused to do the transaction, which was risky. You risk losing a client over it.

She went to her other firm to get the money. She took out a line of credit, loan against her car and cashed in an annuity. The friend she had, she met online on a dating website. She believed he was in New Jersey. She sent the money out to a bank and it went to Southeast Asia. Once the money leaves the U.S. it’s almost impossible to get it back. We called law enforcement and Secret Service on this. She also reported it to the FBI. All those efforts are good but they’re not going to get her money back.

Scenario No. 3:

  • Senior client appears confused to her FA and has significant memory issues. She has revoked her POA held by her older son and given a POA to her younger son who has a criminal record and may be taking advantage of her. 

  • Older son retains counsel to initiate a guardianship proceeding, but nothing has happened for six months.

  • Client initiates an ACATS transfer to a competitor. Branch freezes the account because of concerns about the younger son’s new role in his mother’s life. In the last two days, client has repeatedly called the branch with younger son in background demanding that the assets be allowed to leave.

Mierswa: We were able to get APS involved and we were working with the older son’s lawyer. We were spending more time than expected for a small, $200,000 account, but it was the right thing to do. 

Best practices:

  1. Develop deep relationships with clients. Move beyond liquid net worth and net worth profiling-types of questions. Learn about their short and long-term goals, likes, dislikes, dreams, aspirations, financial expectations, as well as their family dynamics.

  2. Develop a plan (investment policy statement). Write it down. Revisit that plan each year and adjust as necessary. Never let there be a question about goals and objectives. Make sure the plan is clearly communicated. 

  3. Make sure you have a clear picture of a client’s assets including other investment accounts, banking relationships, mortgage relationships, lines of credit, real estate, non-traditional investments, precious metals, investment art and jewelry, etc.

  4. Ask your clients about existing POAs, trusts, wills, health directives and trading authorizations.

  5. Have the conversation with your client(s) about the forms of ownership and have them speak with their attorney or tax professional about how different types of asset ownership will benefit their particular needs.

  6. Form relationships within the firm and the community that may help your clients achieve their goals. Example: estate planning and elder law attorneys, CPAs, professional fiduciaries, county agencies for the aging, care giving organizations, assisted living facilities, long-term care organizations.

  7. Ask your client to provide a third party contact in the event of emergency. Let your client know the limited purpose of this contact and that it can be revoked at any time. 

  8. Ask your client if they would like to invite a trusted friend or family member to the meetings.

  9. Be forthcoming about suitability and do not be afraid to tell the client that an investment may not be suitable based on what they have told you.

  10. Always base your recommendations on the most current financial information.

  11. Have a conversation with your client about current events, family and friends, in addition to their needs and objectives.

  12. Plan to spend extra time with your client ensuring that they have a complete understanding of your recommendations, strategy and the specific investment.

  13. Document each and every interaction with your client.

  14. Follow up with your client in writing and recap your conversation.

  15. Provide your client with a binder so that they can keep important documentation and correspondence in one place. 

Cox: A lot of time, it’s financial advising 101: get to know your client.