The Older Investor
Why Older Americans Face Greater Risk Today
Three out of four Americans over the age of 65 now rely upon investments to help maintain their income. In recent years, hundreds of thousands of older investors have lost billions of dollars in regulated investments that were unsuited to their needs, promoted in a misleading fashion, and accompanied by inadequate and unclear disclosure as to commissions, fees, and performance.
Wealth is not a renewable resource for older Americans. The loss of some or all of a retirement nest egg can be an unqualified tragedy. The result may be the loss of a home, total dependency on family or institutions, inability to meet medical expenses, and worse.
Older Americans cannot leave the fate of their retirement nest eggs to chance. There is always some element of uncertainty in investing, but when the money at stake represents a lifetime of savings, a lump sum pension payment, or a payout of a life insurance policy, taking undue risk may spell disaster. This money is crucial for retirement and cannot be recaptured. Unfortunately, it can sometimes be difficult for older investors to know when the risk is too great, or if they are being misled into investing in a product that is unsuitable to their needs.
The majority of the brokerage firms and individual financial professionals are reputable. However, it must also be recognized that many investment industry practices pose particular problems for older investors. Older Americans must continue to guard vigilantly against investment con artists, but they also should recognize that financial losses can result from the practices of licensed investment professionals.
Though older Americans are no more entitled than any other group of investors to expect insulation from the normal ups and downs of investing, the reality is that an increasing share of the elderly are taking on ever-increasing investment risks. Gone are the days when most older Americans could rely on Social Security, pension payments, and interest on federally insured savings to pay the bills.
The following factors have helped fuel the rising role that higher-risk investments play in the retirement picture of older Americans:
The Marketing of Riskier Investments to Older Americans
While a graying population, the pursuit of higher returns, and the decline of traditional defined benefit pension plans explain much of what is behind the surge of older investors into riskier investments, other factors also explain why so many of the elderly have gone down this path. Foremost among them is the intense and sustained marketing effort waged by financial institutions and individual investment professionals to lure older investors away from federally insured bank products. Why has this effort been so successful? The following factors are paving the way to riskier investing by older Americans:
Net Worth of Older Americans. Many older Americans have potential investment income not because they are wealthy, but because of a lifetime of hard-earned savings. Many with moderate incomes put away a small amount each month in order to support themselves in retirement. In many cases, these savings reflect years of sacrifice to accumulate income for later years. These people often become prime targets for sales pitches that promise safety and security, but deliver neither.
For financial institutions and investment professionals, the attraction to the older investor market might be described as the "Willie Sutton effect." (Sutton was a noted thief who, when asked why he specialized in looting banks, supposedly responded, "Because that's where the money is.") As Bill McDonald, enforcement director of the California Department of Corporations, has noted, "Why fool around with a 30 year old worth a few bucks when there are 70 year olds worth hundreds of thousands?"
The Rise of Uninsured Investment Products Sold on the Premises of Banks. The massive entry of banks into mutual fund sales has helped to coax older investors across the tight rope from insured to uninsured investment products. For older investors who might be intimidated at the prospect of dealing with an unfamiliar brokerage firm, the familiar presence of a familiar bank plays on the bond of trust resulting from 60 years of reliance on the safety net of FDIC protection. NASAA-AARP survey data from 1993 shows that older investors are much more likely than those under age 65 to buy money market funds, stocks, and bonds from their banks.
Lower Resistance to Sales Pitches. Not only are many older Americans without the experience to deal with the increasing complexity of the investment world, but they also tend to be more trusting of salespeople. Research released in 1993 by AARP and CFA showed that the elderly have relatively weak sales resistance and rely excessively on the oral assurances of salespeople.
When an 83-year-old retired schoolteacher was told that she had been defrauded by her broker, the woman wept. She explained that she was distressed not just by the fact that her life savings had been wiped out, but also because she was losing a friend, the only one that she thought she could trust.
Take Charge of Your Money
Map out your financial goals. Experts can help you decide how to invest your money, but first have a firm grasp of your short and long term goals and needs. You need to determine your own needs and your ability to tolerate risk first, and then decide what kinds of investments would best meet these goals.
Know your investment professional. Check your investment professional out with the Department of Financial Institutions Securities Division at 360-902-8760 or 1-877-RING DFI (1-877-746-4334). You can find out if they are registered and if they have a record of state, federal, or self-regulatory disciplinary actions, negative arbitration decisions, and civil litigation judgments.
Take time to interview two or three investment professionals before choosing one. Make sure that they understand your needs and wishes and that you feel comfortable with them.
Understand your investment. Take the time to understand the various investment products you may be considering. Focus on the whole range of the investment's characteristics in your decision-making, not simply on promises of a high return. You should understand the cost, degree and nature of the risks, investment goals, performance history, and any special fees associated with the investment.
Get the information in writing and make sure that you understand the information you are given. Prospectuses are long and technical but you can pick out the risks associated with the investment. The research firm Morningstar publishes detailed analyses of investment products. These can be found at the library.
Understand how your financial professional is being paid. A fee-only financial planner will charge you a certain amount up front, but does not earn income based upon the recommendations he or she makes to you. However, brokers and most financial planners are paid through commissions, which means they get a percentage of the money you invest. A good rule of thumb: The amount of the commission varies by the type of product, and the risk associated with the product. In most cases, the higher the risk, the higher the commission. Don't confuse a sales pitch with impartial advice. Do not work with a financial professional who is unwilling or who claims to be unable to provide the fees or commissions paid on investment products.
Make sure you understand your account statements. Your account statement should reflect only the pattern of investing you have authorized. If you note a discrepancy, raise the problem immediately with your broker, and, if necessary, the branch manager who supervises the broker. Don't be afraid to ask questions about the meaning of any terms or abbreviations that appear on your account statement. The account statement is your primary tool as an investor for policing your investments, so make sure to take full advantage of it.
Keep a diary of all contacts and correspondence with your financial professional. Keep all your account statements. Read and understand all correspondence and account statements. Act immediately if you suspect something is wrong.
Never be afraid to ask questions. Remember "It's Your Money". You are the person in control of your money. Never sign over discretion for your account to your broker, as his or her idea of a "good trade" may not be in your best interest. You have every right to ask a financial professional why he or she is making a certain recommendation to you, what the alternatives are, what the risks are, and how much he or she will be paid for the transaction. If you are uncertain about a product, or what is being told to you, ask questions until you understand.
How to Avoid Investment Fraud and Abuse
Older Americans are the No. 1 targets of investment con artists. Additionally, brokers and financial planners that engage in abusive practices often seek out the elderly. The files of the state securities agencies are filled with tragic examples of older investors who have been cheated out of savings, windfall insurance payments, and even the equity in their homes.
Following these "10 Self-Defense Tips" can reduce the chance of you becoming a victim of investment fraud and abuse.
- Don't be a "courtesy victim." A stranger who calls and asks for your
money is to be regarded with utmost caution. You are under absolutely no
obligation to stay on the telephone with a stranger who wants your
money. Just explain you are not interested and hang up the phone.
- Check out strangers that tout "strange" deals. Say "NO" to any
investment professional or con artist who wants you to make an immediate
decision. Call the Department of Financial Institutions Securities
Division at 360-902-8760 (1-877-RING DFI or 1-877-746-4444) or to find out if the investment
opportunity is registered. Insist on written information about the
investment opportunity, review it carefully, and make sure you
understand all of the risks. Remember that written material can be
fraudulent. Check it out.
- Always be in charge of your money. Constant vigilance is a necessary
part of being an investor. Beware of any financial professional or
telemarketer who suggests you invest in something you don't understand,
or urges you to leave everything in his or her hands. Never trust anyone
who wants you to turn over your money to them and then sit back and wait
- Never judge a person's integrity by how they "sound". Successful con
artists sound extremely professional and have the ability to make even
the flimsiest investment deal sound as safe as putting money in the
bank. Many swindlers combine professional-sounding sales pitches with
extremely polite manners.
- Watch out for salespeople who prey on your fears. Con artists know
that many older Americans worry that they will either outlive their
savings or see all of their financial resources vanish overnight as the
result of a catastrophic event, such as a costly hospitalization.
Therefore, it is common for swindlers and abusive salespeople to pitch
their schemes as a way for older Americans to build up their life
savings to the point where such fears are no longer necessary. Fear or
greed can cloud your good judgment and leave you in a much worse
- Exercise particular caution if you are an older woman with little or
no experience handling money. Ask a con artist to describe his or her
ideal victim and you are likely to hear "elderly widow." Many women have
relied upon their husbands to handle the money. As a result, older women
(particularly those who have received windfall insurance payments at the
death of a spouse) are prime targets for con artists. Always seek advice
of family members or a disinterested professional. An excellent resource
is the Woman's Financial Information Program at the American Association
of Retired Persons (AARP). For more information, write: "Women's
Financial Information Program," AARP Consumer Affairs, 601 E. Street NW,
Washington DC, 20049.
- Monitor your investments and ask tough questions. Insist on regular
written and oral reports. Look for signs of excessive or unauthorized
trading of your funds. Do not be swayed by assurances that such
practices are routine or in your best interest. If you suspect that
something is not right, contact the Department of Financial Institutions
Securities Division at 360-902-8760 or 1-877-RING DFI (1-877-746-4334) and file a
- Look for trouble retrieving your principal or cashing out profits.
If you are not investing in a vehicle with a fixed term, such as a bond,
you should be able to receive your funds or profits within a reasonable
amount of time. Unscrupulous investment promoters pocket the funds of
their victims and will go to great lengths to explain why the investor's
savings are not readily accessible.
- Don't let embarrassment or fear keep you from reporting investment
fraud or abuse. Older Americans who fail to report that they have been
victimized in financial schemes often hesitate out of embarrassment or
the fear that they will be judged incapable of handling their own
affairs. Some older Americans fear that their victimization will be
viewed as grounds for forced institutionalization in a nursing home or
other facility. Con artists know this and count on these fears to
prevent or delay the point at which the authorities are notified of a
- Beware of "reload" scams. Older Americans are dealing with a finite amount of money that is unlikely to be replenished in the event of fraud or abuse. Faced with a loss of funds, some senior citizens who already have been victimized will go along with another scheme in which the con artist promises to make good on the original funds that were lost . . . and possibly generate new returns beyond those already promised. The desire to make up lost financial ground is understandable, but do not allow yourself to be "reloaded".
High-pressure sales tactics. Be wary of sales pitches that
urge you to get in on the ground floor or take advantage of this low, low
Beware of "You must make the decision now." Turn down money requests accompanied by high pressure warnings like "Tomorrow will be too late", or "Act now before the investment is all sold out." Shady promoters do not want you to take the time to read the small print or talk to others.
Promises of exorbitant profits. No honest investment or business is built on quick, astronomical profits. If it sounds too good to be true . . . it probably is.
Claims of no risk, or minimal risks. Profits are guaranteed. Assurances that "you can't go wrong" are a sure tip that you are being conned.
Evasive answers and lack of communication. A promoter's failure to provide details and a disclosure statement or to respond directly to inquiries should diminish your enthusiasm. He is probably hiding something.
The investment doesn't have to be registered. Most investments open to the public must be registered with the Department of Financial Institutions Securities Division.
The investment is not described clearly, in detail, and without hedging. Swindlers often declare that the specifics are "too technical" to describe in layman's terms.
Unprofessional businesslike conduct. Not giving out their phone number, not being available for your phone calls, or not returning phone calls. Not giving out their physical address. Agreeing to meet you someplace other than their office.
Promises of "insider information". First, the use of insider information is illegal. Never buy on the basis of rumors or "hot tips". Keep your eyes open. Act on fact rather than emotion.
Detailed, written information is confidential. You have every right to ask for documentation. You should be very concerned if the promoter is reluctant or hedges by asserting that such data is "confidential" or "classified." But bear in mind that even printed documents can easily be created, forged, or falsified. When in doubt, make no promises or commitments, no matter how tentative.
It is better to wait and lose an opportunity than to take the plunge and lose everything.
Check out the person or firm offering the investment. Obtain the name and address of the person offering the investment and ask what their background is in the field. Check them out. Verify the claims and promises made by the promoter. Read the disclosure document. Talk to other people involved in the investment. Get a professional opinion from your attorney, accountant, or other reliable, disinterested professional.
You are the person in control of your money even if you hire an expert to help you manage it.
If you feel uncomfortable with your brokerage house, account executive, or other financial professional, or have reason to feel that you are being pressured in any way, don't feel guilty about switching your account to another representative or firm. It is your financial future.
The Five Biggest Problems Facing Older Investors in Legitimate Investments
Most financial institutions and individual financial professionals (including brokers and investment advisers) are reputable. Most customers who deal with such institutions and individuals are not defrauded. The truth remains, however, that many aspects of this legitimate investment marketplace are particularly ill suited to the needs of the growing number of older investors who are turning to it.
Commissioned salespeople seeming to be impartial advisers. Older investors tend to place their trust in brokers and other financial professionals. A broker who gives an older investor two hours of top-notch advice about what to do with their retirement nest egg may make less than another broker who spends just 15 minutes with that same investor and puts them into a poor-performing, in-house mutual fund. Learn how they are compensated.
Uninsured investment products sold on the premises of banks. Mutual funds sold at a bank are no different than other Mutual Funds. They are not insured. They are subject to the ups and downs in the market and people can lose some or all of their principal.
Poor quality of oral and written disclosure. To be effective, investment disclosure must provide key information at a time when it is useful and in a form that can be understood. Oral disclosures can be incomplete and even misleading. Written disclosures are long and complicated.
Hidden derivatives in funds touted as "safe." The complex financial instruments known as derivatives can play a useful although often misunderstood role in hedging against market downturns and other developments. Derivatives also can be used for purely speculative purposes. Even such speculation may be entirely appropriate for sophisticated investors who understand the risks and can afford the potential losses resulting from such an aggressive approach. The problem for older investors arises when money market, government bonds, and other mutual funds traditionally portrayed as relatively low risk are "juiced up" with derivatives by fund managers seeking a competitive edge in terms of performance.
Account statements that do not clearly indicate performance, fees, and commissions. Read the account statement and ask your broker to explain everything you don't understand. If your statement doesn't allow you to easily determine how your account is performing, or what commissions or fees were paid, ask. Check to see if it accurately reflects your profile. If not, or you can't tell, ask your broker.
It'$ Your Money
If your financial professional will not, or cannot, answer your questions, maybe it is time to find another financial professional.
Department of Financial Institutions
PO Box 41200
Olympia WA 98504-1200
150 Israel Road Tumwater WA 98501
1-877-RING DFI (1-877-746-4334).