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Financial advisors: Your line of defense against elder abuse

You can be a good guy or a bad guy. Here’s how to be an advocate.

A trusted advisor just might be the best protection against financial elder abuse.

That's a surprising finding, considering 1 in 13 financial advisors has been disciplined for misconduct, according to a recent study. Ingrid Evans, an attorney at the Evans Law Firm in San Francisco, cited that statistic during her presentation Tuesday at the Schwab Impact conference in San Diego.

"Those are people who have been disciplined," she said. "I assume the numbers are higher for actual misconduct."


senior man on phone
DTP | Getty Images

As counterintuitive as it may seem, advisors are in the best position to spot and report bad actors and instances of financial abuse among their elderly clients. In fact, in the Golden State, it's the law.

"In California, you are a mandated reporter: You have to let folks know about elder financial abuse," Evans said. In other jurisdictions, common law negligence applies, so advisors in other states may still be required to report suspicious financial activity they witness among their older clients.

Hallmarks of bad behavior

A wide array of regulations applies to financial advisors to ensure appropriate product recommendations. Those rules are handed down from the Financial Industry Regulatory Authority and the Securities and Exchange Commission, as well as state securities and insurance commissioners. A new set of rules from the U.S. Department of Labor will kick in next year for advisors who handle individual retirement accounts.

Advisors need to consider a range of factors when recommending investments and insurance for their clients, including their age, health, tax status and liquidity needs. An inappropriate recommendation for a financial product could have far-reaching implications for an elderly client.

"A lot of advisors don't consider the fact that money coming out of an annuity is taxed as ordinary income and not at the lower capital-gains rate," said Evans.

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Other red flags include account churning, including excessive trades and the use of reverse mortgages to free up cash to make unsuitable investments.

In one case Evans described, a real estate agent had suggested a woman in her 70s take out a reverse mortgage and use the proceeds to buy an annuity.

"If you have a suspicion that they're a victim, have your client call a lawyer and look into it," Evans said.

If you spot financial abuse against an elderly client, do not call an estate-planning attorney, Evans said. Instead, find a lawyer who will take the case on contingency.

Stay on the right side

"Don't send them to an estate-planning attorney who will charge them hourly and have them spend thousands of dollars to get their money back," Evans warned.

Be sure to report suspicious financial activity to the appropriate authorities: Call your local police department, your city's adult protective services department and your district attorney. Depending on the professional licensing of the perpetrator, you may also have to contact your state insurance department or your state's bar association.

In order to stay on the right side of the law, never forget that your client's interests come first, said Evans. That's still the case if the investor is incapacitated and has someone else contacting you on his or her behalf.

"Your client is the senior; you are not acting on the behalf of the person who is calling you," said Evans. "Make sure this person's motives are aligned with those of the senior."