Financial abuse of seniors is devastating to those who should be enjoying their golden years. A 2015 report by True Link Financial says seniors lose more than $36 billion a year to financial abuse, and the financial industry has been looking for ways to address the privacy and safety concerns of older investors. The Financial Industry Regulatory Authority, a self-governing private body, issued a rule to help that went into effect in early February.
“The bottom line for this new rule is to install safeguards to either prevent potential financial exploitation or stop ongoing exploitation of impaired seniors,” says Clifford Caplan, a certified financial planner at Neponset Valley Financial Partners. With widespread reports of huge amounts of funds being siphoned off from unsuspecting investors’ accounts, FINRA has finally stepped in establish a mechanism and procedure to stop this abuse, he says.
Here’s what you need to know about the new rule.
What Are the Changes?
The purpose of the rule is to identify individuals at risk for being financially exploited or who are already being exploited, and it provides a safe harbor for investment advisers to delay requested withdrawals in order to protect such clients, Caplan says. “It specifically identifies individuals who are age 65 or older as well as persons 18 and older who may have a mental or physical impairment where they are unable to protect their own interests.” FINRA members can delay disbursements if they have a reasonable belief of exploitation, and can provide information to a trusted contact.
The amendment to the rule, which also went into effect in early February, requires broker-dealers to make a reasonable effort to get in touch with a trusted contact person who is 18 or older to confirm the specifics of the client’s health status, Caplan says. They must also identify any legal guardian, executor, trustee or person who has power of attorney to legally deal with this issue.
What Do Advisers Need to Know?
Under the rule, investment advisers must provide oral or written notification no later than two business days after a temporary hold has been placed to explain the reason for the action, Caplan says. “This notification is provided to all parties authorized to transact business, including the trusted contact person of the client. The firm using the safe harbor must then review the facts and circumstances surrounding this action and may continue the delay of disbursement for up to 15 business days unless a state regulatory authority or court rules otherwise.”
While the rule applies to new accounts established after the effective date, it also states that firms must make a reasonable effort to obtain trusted contact person information for existing accounts, Caplan says. “Most broker-dealers will be amending their account forms to include this trusted contact information.”
What Can Advisors Do Now?
Advisors who use Ebix’s SmartOffice already have the tools they need to begin complying with the new rule. With SmartOffice, advisors can identify vulnerable clients, create alerts for those clients’ accounts, designate trusted contacts, and track information about delayed transactions.
Here is one step-by-step approach that SmartOffice users can take:
- Designate contacts with disabilities: Create a custom check box for contacts and label it appropriately (e.g., “Has Disability”). Check the box for any contact known to have a disability. Learn more about creating custom fields.
- Identify vulnerable clients: Create a Dynamic Report (Investment family, Account category). Set up the report’s filter to find all accounts whose primary contact is 65 or older OR whose primary contact is 18 or older and has a disability. Learn more about Dynamic Reports.
- Apply account alerts: Run the report, select all of the accounts, and apply an account alert to all of the records. This alert will appear automatically whenever any of the account records is opened. Learn more about record alerts.
- Designate trusted contacts: Using the same report results, go through each account record and add trusted contact information to the Interested Parties section.
- Keep records: Record any decisions to delay transactions (and the reasoning behind them) in the account notes. Use the notes as a reference if you need to explain your decisions to regulators or other parties.
The rule is meant to protect investors, but can also protect advisers. “The worst-case scenario if their assessment is wrong is that a delay of the disbursement of the funds occurs,” Caplan says. “Since the investment adviser does not benefit from taking this action, the only conclusion that any reasonable person or regulatory body can make is that the investment adviser was simply doing their job and attempting to prevent potential abuse.”
National regulations to protect vulnerable investors have not been standardized, but are a possibility. In the meantime, financial advisers who have not familiarized themselves with the new rules should do so as soon as possible.
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