The Investment Advisers Act of 1940 requires that investment advisers exercise a fiduciary responsibility toward clients. Traditionally, this duty extends to protecting clients against fraud and abuse. But how does this fiduciary duty change when faced with an aging population? It’s no secret: the average age of the American population is increasing. Baby Boomers dominate the world of investment management. In 2008 the SEC staff reported Boomers hold 50% of total U.S. household investment assets. This poses special duties and challenges on today’s registered investment advisers and broker-dealers.
NASAA (the North American Securities Administrators Association) has as of September 29th 2015, proposed a new model law that incorporates best broker-dealer and investment adviser practices for dealing with suspected financial exploitation of seniors and diminished capacity investors. That proposal is available here.
The subject is evolving. Registered investment advisers and broker-dealers have, as part of joint FINRA, SEC, and NASAA initiatives identified increasingly necessary best practices to curb financial exploitation of the elderly. One such practice is more frequent communications with clients. Regulators have also identified that the use of senior designations in advertising and marketing materials as a risk to investors, because a designation may be used to imply expertise or credentials which may be misleading. Another example best practice would be that registered entities are performing audits and “exception reports,” that flag unusual behavior in an investor’s account.
NASAA’s action follows a line of continuing efforts on this front. In 2008, the SEC’s Office of Compliance Inspections and Examinations, NASAA and the Financial Industry Regulatory Authority (FINRA) published joint guidance to assist financial professionals in dealing with situations involving potential elder abuse and diminished capacity.
NASAA’s newly proposed model act will require broker-dealers and investment advisers to report exploitation of a vulnerable client to the state securities regulator and the state adult protective services agency. The act would also provide administrative and civil immunity when reporting possible fraud against the elderly. The rule also enables advisers to provide documents to authorities and/or withhold disbursements from accounts when fraud is suspected.
Of course, it will always be important to ensure the appropriateness of investments for all investors. This includes for example, by maintaining a lower-risk account for most investors nearing end-of-life, particularly those on fixed incomes. But investors who are the same age can have very different investment profiles, and as any professional in the financial services professions knows, what is appropriate for one investor may not be appropriate for another. This is where it becomes more important than ever for financial firms ensure more frequent and better client communication.
To better combat the issue of dealing with a client of diminished capacity, or identifying one in first instance, some firms now record conversations to better identify and manage an investor suffering from memory loss. Firms are practicing “exception reports,” to identify and monitor portfolio allocations. These are for example, commission accounts which red flag if the investor is over a certain age and their portfolio generates a commission-to-asset ratio above a certain percentage.
These are some of the red flags for financial abuse of an elderly or diminished capacity client NASAA, FINRA and the SEC suggested watching for:
• Elderly clientele naturally are more apt to have someone who has power of attorney over their assets, are they to pass away. Check to find out who this person is in advance. If your client has no idea who they are, or this person doesn’t seem like an appropriate party, ask about it;
• Look for any sign the investor-client lacks control over or access to his or her money;
• Look for signs the investor’s address has suddenly been changed to an unexplained or unfamiliar address;
• Look for signs that you are unable to communicate directly with the investor themselves, despite phone calls as other attempts;
• Pay attention if your investor suddenly appears isolated from friends and family, giving a picture of something going on with his or her health, or mental well-being. Disengagement can be a sign of memory loss, or dementia;
• Look for sudden, unexplained disbursements on the investor’s account: and • Has a new individual suddenly stepped into the picture, taking a role in the investor’s money management? These red flags are listed in a jointly issued report published here.
Being aware of these signs, while seemingly obvious, is extremely helpful and important to an RIA in abiding by his or her fiduciary duty. But that isn’t where good best practices end. RIA engagement in due-diligence, regarding any and all sub-advisers is also vital to that RIA’s fiduciary obligation to his or her clientele. Reporting suspicious behavior is of particular importance as the NASAA rule points out.
The NASAA model act is currently open for comment and the comment period closes October 29, 2015.
Parker MacIntyre provides legal and compliance services to investment advisers, broker dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our website for more information.