Investor Toolkit

Advisors are asking their clients for a trusted contact. Choose wisely

Key Points
  • Brokerages have started alerting clients that they can choose a person to be contacted if their advisor suspects fraud is occurring or there is mental decline in the account owner.
  • This new option is part of securities regulators' effort to prevent financial fraud against older Americans, who lose an estimated $36.5 billion to fraud.

When your advisor asks if you want to name a so-called "trusted contact" for your investment accounts, don't view the decision lightly.

As a result of a securities rule change that took effect several months ago, brokerages are in the process of asking clients if they want to choose a person who would be contacted if their advisor suspects fraud or mental decline.

"It's important to be careful about the person you name," said Marve Ann Alaimo, a partner at the law firm Porter Wright Morris & Arthur in Naples, Florida. "You need to make sure it's someone who can be trusted to do the right thing with any information they're given from your advisor."

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The rule change is part of securities regulators' efforts to battle financial fraud against seniors. Each year, older Americans lose roughly $36.5 billion to fraud, according to 2015 estimates from retirement planning site True Link.

Additionally, 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.

In conjunction with the trusted contact requirement issued in February, the Financial Industry Regulatory Authority also began allowing brokers to put a temporary hold on a requested account withdrawal if financial exploitation is suspected.

In that kind of situation, the broker could reach out to the trusted contact with their concerns.

Elder financial fraud cases

Issue Percentage of cases reported
Third-party abuse/exploitation27%
Account distributions26%
Family member, trustee or power of attorney taking advantage23%
Diminished capacity12%
Combined diminished capacity and third-party abuse12%
Elder exploitation5.70%
Friend, housekeeper or caretaker taking advantage<1%
Excessive withdrawals<1%

Source: SOURCE: North American Securities Administrators Association

While clients are not required to provide a trusted contact, brokers must ask if they want to name one. All new accounts must include the option.

Many brokerages have already begun alerting existing clients about the change. Some firms let you name a trusted contact online, while others are discussing the choice with clients in person.

"We believe the best approach is to have a conversation about the trusted contact opportunity with each client, as it can lead to important information about our clients — family relationship dynamics, for example — that can help us more deeply serve their needs," said John Ellis, a principal with Edward Jones.

Almost half of Americans don't expect to have enough to retire comfortably
Almost half of Americans don't expect to have enough to retire comfortably

When you mull over who could fill that role, consider who has good judgement and would know how to handle the responsibility — and respect your privacy — if they have to step in.

"Don't just pick your oldest child because the child is your oldest," Alaimo said.

In fact, she said, the person doesn't even need to be family.

"It could be your attorney or accountant or another third-party professional," Alaimo said. "If you do that, the person also has accountability … for ethical behavior."

She also said that while the rule is aimed at preventing elderly fraud, the time to name a trusted contact is before you reach a point where your own judgment is slipping.

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In other words, you don't want to inadvertently name someone who actually could be poised to take advantage of you.

"What the rule is trying to accomplish is all good stuff," Alaimo said. "But the danger is that sometimes an older person can trust someone — like a caregiver — when that is the very person that could end up harming them financially."

It also is a good idea, she said, to tell your family about the trusted contact.

"You might be better off being transparent about that selection so everyone knows who's going to be contacted," Alaimo said. "It might also discourage anyone from trying to do something wrong if they know a trusted contact is in effect on your account."