Make no mistake about it. Regulators will pay more attention in the near future to advisors' relationships with the growing population of elderly clients.
With more states enacting legislation targeted at protecting seniors, and lawsuits slamming wealth planners for failing to safeguard avidly enough their elderly clients' interests, advisors surely recognize the trend.
When Rick Fleming, who is the first to be appointed to lead the SEC's one-year-old Office of the Investor Advocate, spoke to an advisory conference earlier this year, he highlighted his focus by citing statistics:
- About 10,000 baby boomers will celebrate their 65th birthday every day from now until 2030, he said.
- By 2050, people age 65 and older are expected to comprise 20% of the total U.S. population—or one in five Americans.
- There will be 19 million people age 85 or older by 2050.
- The estimated number of people age 65 and older with Alzheimer's disease will nearly triple to 16 million by 2050.
"It's not hard to see how diminished capacity and increasing dependence on others can make people more vulnerable to financial exploitation and other forms of elder abuse," Fleming said. "It is my belief that the trusted advisor has an indispensable role in protecting investors not only as they plan for retirement, but particularly as they begin to face the special challenges and dangers of diminished capacity," Fleming told his audience.
Mena Bielow-McAfee, the chief financial and compliance officer for Evensky & Katz/Foldes Financial in Coral Gables, Fla., which has $1.5 billion in assets under management, believes advisors, when providing services and products to older clients, should also safeguard against their own potential liabilities by following best practices and avoiding worst ones—and pay special attention to "red flags" that draw regulators’ attention.
First on her roster of such red flags: Exceeding an elderly client's risk tolerance by having them pursue excessively speculative investing without adequately disclosing those risks. Not far behind would be: churning in elderly clients' accounts—or engaging in excessive trading to generate commissions.
Exaggerating an investment's likely performance or guaranteeing returns to an elderly client, could easily prompt regulator scrutiny, she warns. Never tell older clients they "can't lose money," she says. Finally, disclose all fees to the elderly, the Evensky & Katz compliance officer recommends.
Advisors should also keep in mind a short-list of verboten investment products, including non-traded REITS and variable annuities, which they should not offer seniors, says elder law attorney Carolyn L. Rosenblatt of AgingInvestors.com. Rosenblatt is author and a consultant to families struggling with elderly parent issues, and financial planners, who work with seniors.
Regulators will not want advisors selling elderly clients, "complicated, difficult-to-explain investments products," Rosenblatt says. Why? Because even elders with the only the beginnings of diminished capacity may not have the complex judgment skills required to determine the risks of those, Rosenblatt says.
At Evensky & Katz, advisors take an additional cautionary step to reduce the risk that any decline in elderly clients' cognitive functions jeopardizes their understanding of disclosures about fees, risk, commission and speculative nature of investments. Evensky & Katz advisors invite the next generation into the relationship. "We try to involve the children early on," Bielow-McAfee says.
Miriam Rozen is a staff writer for Texas Lawyer who writes about financial advisors.
This story is part of a 30-day series on better serving seniors.