New broker rules aim to curb elder fraud

  • Brokers will be allowed to temporary halt a requested disbursement from an account if they suspect financial exploitation.
  • Investors also will be asked to name a trusted contact who would be contact if an advisor suspects mental decline or potential fraud.
Financial advisor with senior woman
Sturti | Getty Images

Brokers will soon have a couple new weapons to battle financial fraud targeting older Americans.

First, a rule from securities regulators goes into effect on Feb. 5 that allows brokers to put a temporary hold on a requested account withdrawal if financial exploitation is suspected.

"A lot of times advisors haven't had the ability to stop a suspicious transaction," said Marve Ann Alaimo, a partner with law firm Porter Wright Morris & Arthur in Naples, Florida.

"This, at least, lets them protect their clients and put it on hold until they can verify if it's a valid transaction," Alaimo said.

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Separately, an amendment to an existing securities rule will now require brokers to ask customers for a trusted person the advisor can reach out to if fraud or mental decline is suspected. The request for a trusted contact will be made either when accounts are opened or when brokers are updating information for existing clients.

Both changes, which were approved a year ago and are governed by the Financial Industry Regulatory Authority, aim to tackle the growing issue of elder fraud. A year-over-year increase in the number of cases and complaints involving senior financial fraud and exploitation was reported last year by 29 percent of state securities regulators, according to the North American Securities Administrators Association.

Additionally, older Americans lose roughly $36.5 billion to fraud each year, according to 2015 estimates from retirement-planning site True Link.

Elder financial fraud cases

Issue
Percentage of cases reported
Third-party abuse/exploitation 27%
Account distributions 26%
Family member, trustee or power of attorney taking advantage 23%
Diminished capacity 12%
Combined diminished capacity and third-party abuse 12%
Fraud 6.30%
Elder exploitation 5.70%
Friend, housekeeper or caretaker taking advantage <1%
Excessive withdrawals <1%
SOURCE: North American Securities Administrators Association

"Clients who are elderly or challenged in some way ... can be very susceptible to third parties who appear to be helping them but have other motives," Alaimo said.

Fraud can occur when a retiree's cognitive abilities slip, and roughly 1 in 18 "cognitively intact" older adults is victim to financial scams, fraud or abuse, according to a 2017 study in the American Journal of Public Health.

"When an elderly person becomes dependent on someone, you can start seeing large checks going to these caregivers, in part because [the victim] is afraid they'll lose the care they're receiving," Alaimo said.

Investors who are asked by their broker for a trusted contact should choose wisely.

"Sometimes that trusted contact starts out not exploiting the person financially, but over time, as the client becomes less capable of handling their own affairs, the trusted contact might develop an ulterior motive," Alaimo said.

— By Sarah O'Brien, special to CNBC.com

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