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Paul Tramontozzi was invited to the Federal Reserve Bank to discuss elder fraud in financial services

My Day at the Fed

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My Day at the Fed

As many of you know, cognitive impairment is an issue that is very important to me. I lost my father earlier this year to Lewy Body dementia. 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 was recently asked by the Federal Reserve Bank of Philadelphia to share my personal and professional experiences working with retirees with diminished capacity. The Fed was hosting a conference on Aging, Cognition, and Financial Health. The purpose was to bring thought leaders in the financial services community together to combat financial exploitation instead of waiting for regulation from above. At this event, I was able to meet with many federal regulators, advocacy groups, and executive leadership within the financial services industry. These individuals can shape policy, increase awareness, and influence the financial professionals that work with retirees. Here are some of the points that I made when given the opportunity:

New FINRA Rules 4512 and 2165 are a good start

Effective February 5th, 2018, two new FINRA regulations will go into effect that are a step in the right direction to combat potential financial abuse of the elderly. An amendment was made to FINRA Rule 4512 that:

“require members to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer’s account; and (2) adopt new FINRA Rule 2165 (Financial Exploitation of Specified Adults) to permit members to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers.”*

Although many financial service professionals are already making an effort to discover trusted persons in a client’s life, this amendment will make it a requirement. The ability given by Rule 2165 to slow down a transaction if there is suspicion of financial exploitation will also be a useful tool. However, there is still more that needs to be done. The reality is that a large percentage of financial abuse comes from one of the “trusted” persons in a victim’s life. Compliance departments at financial institutions need more leeway to address financial exploitation when it involves a trusted person.

POA isn’t foolproof

Although a power of attorney (POA) is an important legal document for a retiree, they aren’t always enough to prevent financial exploitation. Most POAs are durable which means the chosen agent has the power to make financial, legal or health decisions on someone else’s behalf regardless of the mental capacity of the person who drafted the POA. In the case where the agent is the “trusted” person committing financial fraud, this document can actually make it easier for them to exploit their victim.

Another potential shortcoming of a POA involves the inclusion of a springing provision. Instead of giving an agent the power to make decisions immediately, this provision makes the agent’s power effective at some point in the future. It is usually when the person who appointed the agent is diagnosed with a cognitive impairment by a doctor. Even if the agent has the best intentions, a diagnosis may come well after the point of actual cognitive decline. The damage may be done by the time the POA goes into effect.

Know your client

In some cases, financial exploitation can be uncovered by a financial professional simply knowing their client, the people in their life, their spending habits, and their lifestyle. This will require more training for employees of financial institutions that work directly with clients. There is also optimism that advances in data gathering technology will make it easier to spot any abnormalities in transactions that could be a sign of financial abuse.

It’s also important to remember that the issue of financial exploitation with the elderly is not limited to persons with a mental incapacity. It’s an issue for all retirees. Those in the financial services industry that 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 with a retiree for the first time and learn that they have little understanding of the mechanics of certain financial products that they own. They could be unclear about what is actually guaranteed or what a reasonable expectation should be for investment returns. Marketing material for variable annuities, market linked CDs, and permanent insurance products can be very difficult for many to understand, let alone someone whose cognition is in decline. The material that is used to market many of these products should be appropriate given the prospective audience is typically older individuals.

I suggested basic product questionnaires be used during the sales process to assess the prospective buyer’s understanding of what they are getting into. I emphasize the word “basic”, because, in my opinion, most prospectuses and applications of financial products have pages of disclosures that do very little to assess the client’s capacity to understand how the product will function.

Over the years our retirement system has transitioned from one of defined benefits (pensions), which took a lot of the decision making out of the hands of retirees, to one of defined contributions (retirement accounts) which puts the onus on the retiree to manage their finances. As retirees continue to live longer lives due to medical advancements, the need to put a better system in place to service their finances will continue to grow. It was a great experience to be in a room with those that recognize the need for this change and are acting on it.

*Source: FINRA.org

Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Stratos Wealth Partners, Lob Planning Group and LPL Financial do not provide legal and/or tax advice or services. Please consult your legal and/or tax advisor regarding your specific situation.

charitable giving with a donor advised fund

Giving Through a Donor Advised Fund

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How Your Charitable Giving Can Benefit From a Donor Advised Fund

It’s not easy keeping up with the proposals by the GOP regarding tax reform. However, two common goals that keep coming up are to decrease income tax rates and increase the standard deduction. This could effectively decrease the benefit of charitable deductions. A decrease in income tax rates could ultimately decrease the value of a deduction. Raising the standard deduction, would mean less people itemizing their deductions. This could lead to less charitable deductions altogether.

Why not a Donor Advised Fund?

An overlooked tool for charitable giving in 2017 is a donor advised fund. By putting money into a donor advised fund (DAF), you could take the charitable deduction this year, but direct that money to charitable organizations later on. A donor advised fund is an account that is held with a sponsoring charity where a donor can make a charitable gift. If you are charitably inclined, it is a way to set up a vehicle to manage these funds with ease. Once the gift is made, the donor retains the ability to recommend how the sponsoring charity directs that gift over time.  A successor can even be named to the DAF to continue directing gifts from the fund after the donor passes away.

Still take the Charitable Deduction

The tax benefits are similar to a gift that is made directly to a public charity. It may qualify for a charitable income tax deduction equal to the fair market value of the gift in the year that it was made. It would be subject to the same income limitations as charitable donations. Currently no more than 50% or adjusted gross income can be deducted for cash gifts and 30% for property with a long term capital gain. Unused deductions can be carried forward for up to 5 years.

Taking some gains without paying Uncle Sam

With equity markets at all-time highs, many investors find themselves holding assets with large capital gains. These assets can be donated to a DAF, and once in the fund, can be sold without incurring a capital gain tax. This makes it a great strategy for highly appreciated stock. It can also reduce a concentrated position in your portfolio. The funds can then be professionally managed until they are granted to a charity.

DAF in Action

Let’s say you purchased a stock position with a fair market value of $2,000 and it has increased in value to $10,000. If your intention is to donate $10,000 to a charity, you may want to consider putting the stock position in a DAF now, and direct that money to various charities over time. This way you may receive the $10,000 income tax deduction immediately subject to your income and you will not be obligated to pay a capital gain tax on the $8,000.

You should always consult an accountant before making tax planning decisions and work with a trusted financial advisor to see how your charitable giving may benefit from the use of a donor advised fund.

Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

While donor advised funds have many advantages, some disadvantages to be aware of include but are not limited to possible account minimums, strict limits on grant allocations, management fees and the potential that future tax laws may change at any time that may impact the tax treatment and benefits of donor advised funds.

Stratos Wealth Partners, Lob Planning Group and LPL Financial do not provide legal and/or tax advice or services. Please consult your legal and/or tax advisor regarding your specific situation.