Business Transformation | 10.30.24
The Growing Risks of Fiduciary Abuse and Financial Scams
by: Rich Blake
As Financial Exploitation Awareness Month brings attention to the growing risks in today’s financial landscape, advisors must remain vigilant against increasingly sophisticated scams targeting vulnerable clients. With the rise of AI-driven "deep fakes" and other deceptive tactics, nearly anyone could fall victim to fraud. Yet, beyond common assumptions, fraudsters often exploit not only senior citizens but also younger individuals facing challenges like illness, disabilities or abusive relationships. This article sheds light on these rising threats and critical resources advisors can reference to protect their clients.
Financial abuse remains rampant. It's fully lodged on the regulatory front-burner, as evidenced by recent remarks given at an industry conference by Robert W. Cook, president and CEO of the Financial Industry Regulatory Authority (FINRA).
Going back several years, FINRA rules have been crafted and readjusted via close collaboration with the industry so that the standard of care continues to evolve, reflecting hard-learned experiences and complicated realities. "The goal," Cook said, "is to permit firms to respond proactively to potential fraud against seniors and other vulnerable investors."
Key Line of Defense: Trusted Contacts
Current FINRA rules permit a member firm to "place a temporary hold on a securities transaction or disbursement of funds or securities from an account when the firm reasonably believes that financial exploitation may be occurring."
The rules also now require member firms to make reasonable efforts to obtain contact information for a trusted person with whom to communicate regarding a customer’s account if a firm has concerns, according to Cook.
Seniors and vulnerable adult investors have been targeted for decades, but threats are morphing at an alarming speed. At the same time, some schemes are just a familiar pattern in which a perpetrator gains trust, and, ultimately, access to the victim’s bank accounts.
A Changing Threat Landscape
FINRA says it encourages member firms to stay abreast of evolving threats and, where warranted, "enhance their policies, procedures and practices accordingly."
Advisors are well-aware of the current emphasis.
"Continuing education and training on this issue has been a priority at the banks, especially over the past few years," one advisor confirms, asking for confidentiality. “FINRA has made it a priority.”
But sometimes abuse situations become extremely complicated because of myriad factors, including cognitive issues coming to bear.
“This is where that trusted contact can be a huge help,” he said. “Obtaining the info, it's one of those seemingly small steps that can get put aside when you are juggling a lot of daily tasks. But you need to make sure it’s sorted."
Indeed, regulators and advisory firms are all over the issue of financial scams, in conjunction with anti-money laundering (AML) and know your client (KYC) precautions, explains another veteran financial planner, also requesting anonymity.
"We are constantly doing required modules on the subject – what to look out for, suspicious transactions, you name it." Yes, it can be tedious, he said. "But in the long run it protects you and your firm," he added.
Despite the continuing education, training videos, reams of published bulletins and good faith efforts, the problem isn't going away.
According to a recent FBI report on elder fraud, total losses reported by elderly victims increased 11% in 2023 compared to a year prior, with victims losing about $34K on average.
FINRA’s Financial Intelligence Unit (FIU) and Vulnerable Adults and Seniors Team (VAST) have issued intelligence reports that detail the "devastating consequences for the victims and the importance of education about financial scams to prevent initial victimization and re-victimization."
Sadly, as it turns out, once a person has been victimized by financial fraud, the chance of getting targeted again goes up, FINRA said.
Increasing Risks For Aging Seniors
The 2020 census showed that some 56 million people – roughly 17% of the U.S. population – were over the age of 65, per Gravity Exists, an online forum for wealth advisors. The Department of Health and Human Services expects that number to rise above 80 million by 2040.
According to the Federal Reserve, roughly 10,000 Americans turn 65 every day. And those who are 55 or older control more than two thirds of the nation’s wealth.
Additionally, some 28% of Americans over the age 65 have trouble with cognition, according to a report issued in November of 2022 by The Administration for Community Living.
"Educating older investors, their loved ones and financial professionals about investment scams can help prevent these investors from being exploited," FINRA said.
Romance Scams Rising
While elderly citizens are routinely targeted, financial abuse can harm people of all ages. Romance-related scams, conducted via dating websites, victimize people as young as 18 years old. In 2022, the Federal Trade Commission reported that an estimated $1.3 billion was siphoned via some form of a romance scam.
Many of these incidents go unreported. Additionally, troublingly, "sexploitation" scams have become more prevalent in the digital age. These cases begin with an online encounter that leads to the sharing of intimate photos and ultimately the victim being blackmailed.
Meanwhile, AI-generated propositions (text and email “phishing”) are proliferating.
The good news is that many of these scams are fairly easy to spot. For example, an acquaintance asks for a quick favor by way of a text that arrives out of the blue. That’s odd enough. But on top of it, the request is for a gift card; that request for money in a non-traditional way in itself is a red flag.
A Giant Takes Action
Sometimes it's not just a particular sub-set of investors that schemers uniquely target. It can be a specific firm.
This past September, Fidelity Investments put stricter limits on the deposits customers make through its mobile app after the investment management behemoth spotted a reoccurring check-fraud scheme. The guard rail expansion was centered on cash-management accounts, a type of brokerage account that can used in the same manner as a checking account. Prior to the change, certain customers could use the app to deposit up to $100,000. That amount was reduced to $1,000, The Wall Street Journal reported.
The Fidelity online check-fraud scheme shared some similarities with the fraud wave that hit JPMorgan Chase, the Journal added.
For individual advisors, tending to business day to day, detecting financial abuse or pursuing suspicions or allegations can be difficult. This is because situations might involve a seemingly well-meaning relative, friend, neighbor or paid caregiver, and maybe in some cases bearing a document conferring a power of attorney (POA).
In March of 2023, FINRA hosted the Senior Investor Protection Conference, a one-day event dedicated to sharing up-to-date regulatory information on the latest scams, while also offering effective strategies and solutions for protecting vulnerable investors from exploitation.
A Daily Struggle
Even for seasoned, sensible advisors, financial abuse is a difficult subject to even begin to tackle, explains Elizabeth Yoka, a manager with FINRA's Vulnerable Adults and Seniors Team which, essentially helms the FINRA Securities Helpline for seniors.
"I'm just talking about from the psychological angle of having these conversations," she said during the investor protection event. Yoka describes having the same conversations on the phone with seniors – every single day.
"People tell us stories and we're trying to tell them this is the sign of a scam and they're so adamant or they're just so lonely that they want to believe it so bad," Yoka said. "They want to really believe that this is a true investment, or they want to believe that there's someone out there that really loves them and that wants to be with them. And I think that's the hardest part."
FINRA, adds Yoka, maintains close relationships with officials at the FBI and officials at states' Adult Protective Services, who are often called upon to conduct wellness visits to the individuals' homes.
She advises firms to pool expertise and resources and to keep their clients abreast of the latest scam trends – like that hard-luck story making the rounds, the one involving some single mom whose husband or boyfriend is working on an offshore oil rig – and to remind clients to keep their guard up.
A Wealth of Resources
Carol Ringrose Alexander, an executive vice president at Retirement Investment Advisors, Inc. in Oklahoma City, has publicly recalled how her experience caring for her father, an Alzheimer’s sufferer, led her to pursue the Elder Planning Specialist designation by way of the Financial Planning Association (FPA). The program helps advisors navigate delicate, complex situations that routinely come up when working with aging clients.
“We face these issues and challenges on a regular basis,” Alexander told Gravity Exists back in 2023. “This training helped my capacity to do a better job taking care of my clients and helping their families.”
Advisors are encouraged to tap into a wealth of FINRA resources available online. When it comes to thorny questions of legal rights, obligations and/or compulsory actions, a professional within a broker-dealer unit or bank advisory team can check with the AARP Fraud Watch Network website as well as the North American Securities Administrators Association (NASAA) which has a senior-fraud focused website containing resources compiled for each state. The website even provides county-level contacts for regulators as well as for officials in charge of Adult Protective Services.