01.22.20

Trusted Contact Rule Helps Advisors Broach Serious, Sensitive Subjects

by: Rich Blake

Financial exploitation of the elderly, often by family members, has been on the rise over the past decade — and it tends to increase during the holiday season with greater numbers of out-of-town relatives gathering together, experts say.

Bank and credit union employees, given their central position in most abuse cases, are the critical first line of defense, according to a new research paper, "The Impact of Training Financial Professionals to Prevent Financial Exploitation," published by the AARP in conjunction with the Virginia Tech Center for Gerontology.

Training programs, such as the AARP’s new “BankSafe” initiative, and other new Securities and Exchange Commission (SEC) regulations, are helping to curb such abuses.

One of the most important new rules, which took effect last year, requires financial services professionals to ask for a trusted contact when opening new accounts, or when updating existing accounts. It turns out this basic informational extraction, while seemingly quick and simple, has had a significant side benefit — helping advisors engage older clients regarding sensitive issues better.

According to bank and credit union advisory industry executives, the conversational doors that are opening are overdue, but are leading in the right direction.

Difficult Subjects

The trusted contact rule has been an effective way for advisors to broach difficult subjects, several investment advisory executives have told BISA Portfolio during interviews conducted this summer and fall.

Thorny issues transcend the possibility of a scam being perpetrated by a relative. That more elderly people are being defrauded owes to demographics: the population of older adults has been steadily expanding.

The same graying trend is reflected in the apparent rise in cases of brain disease. An estimated 4.5 million Americans were diagnosed with dementia in 2012, compared to 4.1 million one decade earlier.

The trusted contact rule is a means for advisors to look out for older clients who may seem confused about their accounts and showing signs of dementia, said Next Avenue's money and work editor, Richard Eisenberg.

An AARP study found that half of older Americans want their financial institution to alert a pre-identified person if a certain amount of money is withdrawn.

This additional person can be contacted should other issues arise, including: confirming an address due to returned mail or an outstanding un-cashed check; the health status of the client; assistance in identifying a legal guardian, executor, trustee or the power of attorney. 

Importance of Knowing Your Client

New AARP research acknowledges that bank and credit union employees walk a fine line between looking out for elderly clients and possibly upsetting them, and therefore employees need to feel confident that a given situation warrants notification of a trusted contact. That's why knowing your client is so vital, advisory executives say, and why the trusted contact rule can now become an integral component of elder care.

The rule traces back to February 2017 when the Financial Industry Regulatory Authority (FINRA) proposed new Rule 2165 (Financial Exploitation of Specified Adults) and amendments to Rule 4512 (Customer Account Information).

The SEC approved both proposals the following month, and the new rules took effect in February 2018. Taken together, the two rules addressed concerns FINRA had been expressing for several years as far as firms needing to pay closer attention to seniors.

Rule 2165 allows a securities firm to place a temporary hold on a disbursement of funds or securities from the account of a specified adult if the firm has a reasonable belief a questionable request has been made regarding financial exploitation of a customer. It allows the bank or credit union representative to step back from a disbursement request and ask, does this request fall into what is a normal or expected request?

The amendments to Rule 4512 require firms to make reasonable efforts to implement a “trusted contact” system into their customer accounts.

Such efforts, to obtain the name of a trusted contact and information about how to reach them, are required in two instances: upon the opening of a non-institutional customer’s account; or when updating account information for a non-institutional account in existence prior to the effective date of the amendments, according to regulators. The trusted contact is intended to be a resource for firms in administering customer accounts, protecting assets, and responding to possible financial exploitation. The amendments do not prohibit firms from opening and maintaining an account if a customer fails to identify a trusted contact person, provided there are reasonable efforts made to obtain the information. Directly asking a customer to provide the name and contact information for a trusted contact would constitute a reasonable effort, according to regulators.

Interviews with financial executives reveal a common theme in terms of the trusted contact request and how it has led to useful conversations happening more frequently, particularly with clients nearing retirement or in retirement.

Out of these conversations, there has emerged at least one major takeaway: Many older clients recognize and appreciate that what they are being asked makes sense and that it is best to name a trusted contact while they are still mentally sound.

For most people, the idea that a friend or family member would take advantage of them might seem far-fetched or insulting so advisors should be careful how they broach the trusted contact request. But the threat of fraud shouldn’t be dismissed either.

According to the U.S. Consumer Financial Protection Bureau, elderly Americans exploited by fraudsters between 2013 and 2017 suffered, on average, losses of $34,200. Such cases involved more than $6 billion in actual (and attempted) fraudulent withdrawals, the CFB said, citing official government reports of suspicious financial activity.

 The problem is “widespread and damaging,” the agency said.

Virginia Tech Center for Gerontology researchers studied the impact of training bank and credit union staffers to better to spot exploitation. The research shows when frontline employees underwent the AARP BankSafe training program they wound up becoming more confident in their ability to recognize and prevent financial abuses.

"The trusted contact mandate really serves to benefit all parties involved," says Chris Hull, a CFP with Southtowns Financial Group in Orchard Park, New York. "It benefits the client, the advisor, and the advisor’s firm. It’s really something that should have been standard operating procedure for advisors all along, especially working with retirees."