13 December 2018
The focus on retirement accounts and senior investors has been on the SEC’s National Exam Priorities for years. However, it is especially so this year, and as the US population ages and more baby boomers enter retirement, the focus and concern for senior investors will continue to grow.
Do you have a direct relationship with retail clients who are at or approaching retirement age? If so, you will want to know what the SEC is asking about and the practical things you can do to protect your senior clients. Read on!
SEC examinations with a focus on senior investors have increased this year. We probably could have anticipated that, considering the SEC stated in its 2018 Examination Priorities that they were going to focus on retail investors, “particularly seniors and those saving for retirement” and that they were going to “pursue examinations of firms that provide products and services directly to them.”
The SEC kept that promise. We’ve seen several request letters this year, from the Chicago Regional Office, that included 10-12 questions specifically about senior investors. The SEC hasn’t yet issued the results of their findings or any guidance from these senior-investor-focused exams. However, we anticipate that they will issue guidance, in the form of a Risk Alert or an IM Guidance Statement.
In the meantime, we would like to provide some practical suggestions for how to preemptively address the questions we’re seeing on the SEC’s examination request lists. Most of the questions pertain to seeing whether advisers have policies and procedures that uphold their fiduciary duty, specifically to their senior clients.
What is a Senior Investor?
As per the request letters from the Chicago Office, a “Senior Client” was defined as:
any retail advisory client who is age 62 or older, retired, or transitioning to retirement, including accounts of deceased clients, and retail clients in joint accounts with at least one individual meeting this definition.
Your Fiduciary Duty
As an investment adviser, you are a “fiduciary.” What does it mean to be a fiduciary?
- You have an obligation to act in the best interest of your clients;
- You owe your clients a duty of undivided loyalty and utmost good faith;
- You should avoid engaging in any activity that conflicts with your clients’ interest;
- If you have conflicts, you must fully disclose them so that clients can make sound decisions; and
- You must provide full and fair disclosures of all material facts.
Simply stated, you need to make sure you are doing everything you can to protect your clients, which includes protecting older clients from financial harm.
You probably already knew all of that at a high level, but you may be wondering how you can put your “fiduciary duty” into action for your senior clients. Here are some real-life examples:
- Adopt policies and procedures that address:
- the transition of clients from actively employed to retired;
- the situation of diminished capacity or competence; and
- the suspicion of elder abuse.
- Make a reasonable effort to establish a trusted point of contact.
- Provide full and fair disclosures.
- Train your staff.
We go into more details on each of these below.
Adopt Policies & Procedures
The Transition from Actively Employed to Retired
Two of the items listed on the SEC’s senior-investor-focused request list were:
- Provide any policies and procedures designed to facilitate the transition of a Senior Client from actively employed to a retired status (e.g., communication with a client to setup an updated investment profile).
- Provide any policies and procedures that discuss how often the Adviser communicates with its clients (e.g., adviser speaks with its client on a quarterly basis to update the client’s investment guidelines).
Create a policy and a process for ensuring that you speak with your clients regularly (perhaps quarterly, but no less than annually) to confirm the suitability of their investment profile and/or investment guidelines.
Topics of conversation should include:
- changes to income needs
- changes in financial situation
- family changes (death of a loved one or birth of a grandchild)
- housing changes (seniors often downsize their homes), and
- changes to important documents like trusts and wills
- changes to employment status
You’ll want to find out if the client has retired because retirement can change their entire investment profile, and to uphold your fiduciary duty, you need to help facilitate the transition of a senior client from actively employed to a retired status when it happens. Also, if they are invested in complex products (i.e. variable annuities), make sure that it’s still suitable for them.
Document the conversation, including:
- who the adviser spoke with
- what was discussed, and
- whether their investment strategy and/or client profile changed
Diminished Capacity or Competence
“Diminished capacity” or “diminished competence” is the decline of one’s skills or the ability to make sound decisions, which can be caused by diseases such as Alzheimer’s or dementia. However, symptoms can begin long before a diagnosis.
Signs of Diminished Capacity or Competence
Below is a list of indications of diminished capacity for you to be aware of as a financial adviser:
- Decision making that is inconsistent with currently known long-term goals and/or commitments
- Refusal to follow appropriate investment advice, especially if the advice is consistent with previously stated investment objectives
- Concern or confusion about missing funds in the client’s account, where reviews indicate there were no unauthorized money movements or no money movements at all
- Lack of awareness or understanding about recently completed financial transactions
- Inability to recognize or appreciate the consequence of decisions
- Inability to process simple concepts
- Forgetfulness or memory loss
- Erratic behavior
- Disorientation with surroundings or social setting
- Uncharacteristically unkempt hygiene or self-care
Although it can be a sensitive conversation, we suggest that you encourage your clients to document their wishes and share them with you before the risk of diminished capacity or competence arises. We recommend training your staff on the signs of diminished capacity and what to do if a senior client shows these signs, such as notifying the appropriate people at your firm so that they can make sound decisions. We recommend creating policies around supervising those who provide advice to senior clients and who they should report to.
When you suspect signs of diminished capacity it is wise to hold off making drastic investment decisions in their account until you have been able to fully investigate your concerns.
Sadly, senior investors can be the target of financial abuse and other scams, particularly seniors who are:
- have recently lost someone, or
- are showing signs of diminished capacity.
Indications of Elder Abuse
Elder abuse comes in many forms, but the ones most pertinent to you as a financial adviser include, but are not limited to:
- Changes to beneficiaries
- Changes to power of attorneys
- Changes to trustees
- Changes to investment strategies, guidelines, or restrictions that are inconsistent with currently known long-term goals and/or commitments
- Atypical or unexplained withdrawals
- Drastic shifts in investment styles
- Forging of signatures on checks or other financial or legal documents
- Problems reaching the client
- A new contact (relative or professional) who is assisting the senior client with his or her financial decisions
- A client’s family member contacting you to inquire about the account, or to attempt to enact transactions without authorization
Much like child abuse, some states have adopted their own requirements about reporting elder abuse. As with other professions, such as educators and counselors, certain states are designating investment advisers as mandatory reporters, requiring that you report to the state so that the state can investigate the situation.
Again, put policies and procedures in place for when there are sudden changes to these key documents, such that they trigger a checks and balance process within your firm to protect your client from a third party potentially taking advantage of them. If your clients express a change in their wills or trusts, try to understand why. Ensure the changes are truly the wishes of your client. Include a process by which concerning details are escalated to compliance or legal.
In some situations, it may be necessary to communicate with the custodian to further investigate the suspected problem.
You may even consider creating an additional document for your senior investors to populate and sign at the execution of the advisory agreement or at a certain age (perhaps 65) whereby you request information regarding their wills and “trusted contact(s).”
Know your state’s laws so that you are aware of whether or not reporting elder abuse is your legal duty.
When you suspect signs of elder abuse it is wise to hold off making drastic investment decisions in their account until you have been able to fully investigate your concerns.
If you do suspect elder abuse, document your course of action. We cannot emphasize enough the importance of documentation!
What do you do if your client does not seem to understand your conversations or seems very confused when you talk to them? What if your client becomes hospitalized, and you need instructions on their account. What do you do when a client passes away? Should you continue to invest (buy and sell securities) in the deceased client’s portfolio? Who do you take instruction from?
We suggest you make a reasonable effort to identify a trusted contact for your clients. Having your clients, particularly your senior clients, provide a trusted contact can assist you when scenarios become complicated or potentially harmful. A trusted contact can be a resource in the event that your senior client shows signs of diminished capacity or elder abuse, becomes incapacitated, or passes away.
Plus… the SEC is asking about it on their request list:
“Provide any policies and procedures that contemplate or consider establishing a trusted point of contact in the case the client(s) have a diminished capacity or competence”
Many ask, “How do I obtain a trusted contact?” Some clients have used an addendum to their agreements and supplied it to all senior investors for them to update. Other advisers, have elected to request a trusted contact verbally and log it in their systems. There is no rule that requires an adviser to obtain a trusted contact, so do the best you can, making reasonable efforts. Some clients may refuse to provide you a trusted contact, or you might send out addendums and your clients may never reply. You can follow up but that’s all you can really do. We would say, at that point, you have made a reasonable effort.
Full and Fair Disclosures
Disclosures in Marketing
The Anti-Fraud provisions of the Investment Advisers Act prohibit misstatements or misleading omissions of material facts. As an adviser you have an affirmative obligation of the utmost good faith, to make full and fair disclosures, and to avoid misleading your clients. If marketing specifically to senior investors the materials presented must be clear of all risks, fees and other relevant facts so that the client is receiving all the information necessary to make a sound decision about their investments.
If you market specifically to senior investors, make sure it’s not misleading. Have all of your marketing materials reviewed for compliance, prior to use. Make sure you inform your clients of the features of any strategy they are investing their assets within, including the associated risks. This is of the utmost importance for more complex products such as variable annuities, REITS and structured products.
Disclosure of the Costs of Investing
Every dollar an investor pays in fees and expenses is a dollar not invested for his or her benefit. Therefore, it is your fiduciary duty to properly disclose your fees, calculation methodology, expenses and other charges your investors will pay as well as any conflicts of interest (such as financial incentives) that might encourage you to recommend higher cost or riskier products or services to your clients.
Make sure your ADV Part 2A and investment agreements clearly and consistently disclose all fees and expenses clients will be paying, including the treatment of refunds, should you bill in advance.
Periodically review fees billed to clients to confirm that the rates charged are consistent with the rates agreed upon with your clients and that your calculations are accurate.
Review your best execution efforts to make sure clients are not paying unreasonable fees for trading. For example, some brokers charge a higher commission if a client does not elect to receive electronic statements. Clients might not be aware of this fact, and it would be in your best interest to inform the client of their options.
If your clients are invested in complex investment products or non-traditional securities that inherently have higher fees, ensure that they are aware of the costs involved.
If you offer consulting services that bill by the hour, keep sound documentation and schedule of the work involved to support the fees being charged and make sure they are reasonable in relation to the advice being provided.
Training your employees is just as important as having strong policies and procedures in place. Employees are the frontline, the first line of defense to protect your clients from financial harm.
Teach your staff to become knowledgeable and aware of the signs of diminished capacity and elder abuse. You can use the lists of examples provided above; however, whenever possible, use real life situations from your own experience, client base, or even look to the news and find advisers who have struggled with senior fraud, to help explain the importance of your senior investor policies. Stories and case studies are a memorable way to learn, apply, and retain information.
Training should be specific to the employees: investor-facing marketing or client service staff should understand the need to document conversations, know behavior to look for, and understand the investment style appropriate for a senior investor.
The baby boomer generation began turning 65 in 2011, which brings a surge in an aging population. Because of this, the focus and concern for senior investors is heightened and will only continue to grow. All advisers have a fiduciary duty to their clients, and there are a number of ways you can put that fiduciary duty into practice to protect your senior clients from financial harm, including:
- developing policies and procures specific to the concerns of senior investors and those reaching retirement age
- training your staff on the signs of diminished capacity and elder abuse
- attempting to obtain a trusted contact
- ensuring you are disclosing the costs of investing with your firm, any conflicts you may have, and ensuring full and fair disclosure in your marketing practices.
To help with these, we have developed sample policies, specific to senior investors, that we are happy to provide you, and we have also put together a form that you can use to make a reasonable effort to obtain a trusted contact. Feel free to contact us if you would find either of those valuable.