As many of you know, cognitive impairment is an issue that is very important to me. I lost my father to Lewy body dementia in 2017, and the experience gave me a new perspective on managing a family’s finances. Without a plan and the right advice, it can be like walking through a minefield. I wrote about what I learned in 5 Things I Wish I Told My Dad.
In late 2017, the Federal Reserve Bank of Philadelphia asked me to share my personal and professional experience working with retirees with diminished capacity. The Fed was hosting a conference on Aging, Cognition, and Financial Health, bringing leaders in the financial services community together to combat financial exploitation rather than wait for regulation. I met with federal regulators, advocacy groups, and executives from across the financial services industry, people who can shape policy, raise awareness, and influence the professionals who work with retirees. Here are some of the points I made.
FINRA Rules 4512 and 2165 were a good start
On February 5, 2018, two FINRA rules took effect that were a step in the right direction in combating financial abuse of older adults. An amendment to FINRA Rule 4512 requires firms to make reasonable efforts to obtain the name and contact information of a trusted contact person for each customer’s account. New FINRA Rule 2165 (Financial Exploitation of Specified Adults) permits firms to place temporary holds on disbursements from certain customers’ accounts when there is a reasonable belief of financial exploitation.
Many financial professionals were already trying to identify the trusted people in a client’s life, and the amendment made it a requirement. The ability to slow down a transaction when exploitation is suspected is also a useful tool. However, more still needs to be done. The reality is that a large share of financial abuse comes from one of the “trusted” people in a victim’s life. Compliance departments need more leeway to act when exploitation involves a trusted person.
A power of attorney isn’t foolproof
A power of attorney (POA) is an important legal document for any retiree, but it isn’t always enough to prevent financial exploitation. Most POAs are durable, which means the agent can make financial and legal decisions on someone else’s behalf regardless of that person’s mental capacity. If the agent is the “trusted” person committing fraud, the document can actually make it easier to exploit the victim.
Another potential shortcoming is a springing provision. Instead of giving an agent authority immediately, it makes the agent’s power effective at some point in the future, usually when a doctor diagnoses the person with a cognitive impairment. Even if the agent has the best intentions, a diagnosis can come well after cognitive decline has begun, and the damage may be done by the time the POA takes effect.
Know your client
In some cases, financial exploitation can be uncovered simply by a financial professional knowing their client: the people in their life, their spending habits, and their lifestyle. That requires more training for employees who work directly with clients. There is also optimism that better data and technology will make it easier to spot unusual transactions that could signal abuse.
It’s also important to remember that financial exploitation of older adults is not limited to people with diminished capacity. It is an issue for all retirees. Those of us who work with the public are on the front lines and have an opportunity to get ahead of it.
More that can be done
It’s not uncommon for me to meet a retiree for the first time and learn that they have little understanding of how some of the financial products they own actually work. They may be unclear about what is guaranteed or what a reasonable expectation for returns should be. Marketing materials for variable annuities, market-linked CDs, and permanent life insurance can be difficult for anyone to understand, let alone someone whose cognition is declining. Materials aimed at an older audience should be written with that audience in mind.
I suggested using basic product questionnaires during the sales process to assess whether the buyer understands what they are getting into. I emphasize the word “basic,” because in my opinion most prospectuses and applications contain pages of disclosures that do very little to assess a client’s capacity to understand how a product works.
Over the years, our retirement system has shifted from defined benefits (pensions), which took many decisions out of retirees’ hands, to defined contributions (retirement accounts), which put the responsibility on the retiree. As people live longer, the need for a better system to serve retirees’ finances will only grow. It was a great experience to be in a room with people who recognize the need for change and are acting on it.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
