Mention "elder abuse" and most lawmakers conjure up images of the fleecing of Brooke Astor's estate or an elderly relative kept in squalid conditions. Cases like these make for excellent tabloid fodder. In fact, recently the New York Post prominently featured a story about Cher Thompson, a young woman who allegedly bilked a deaf octogenarian with dementia out of his life savings.

Taking Over Elderly Parents' Finances

Why You Shouldn't Allow Family To Manage Your Money

8 Steps To Protect Your Family

What gets far less attention is perhaps the most prevalent form of elder abuse - the sort perpetrated by stockbrokers. The Financial Industry Regulatory Authority (FINRA), Wall Street's governing and enforcement body, defines financial elder abuse as the "misuse of an older adult's money or belongings by a relative or person in a position of trust."

A clear-cut example recently made headlines in a number of financial trade publications. Stockbrokers Thomas B. Cooper and Peter L. Boorn at Beverly Hills-based StockCross Financial Services Inc. allegedly bilked 95-year-old David Wolfson of nearly all his assets and put his house at risk after recommending unsuitable and risky investments. The brokers dropped Wolfson as a client once they drained him of his cash. An arbitration panel awarded the elderly man triple damages, totaling $1.6 million. It was an unprecedented amount that underscored the severity of the abuse.

Exploiting the elderly is actually quite common on Wall Street. The temptation to commission-earning brokers is obvious. There isn't a lot of money to be made managing the accounts of risk-averse investors who are looking to clip coupons and live off interest income from municipal bond funds, Treasuries or other safe investments. Some Wall Street firms just can't but regard the elderly as ripe for the fleecing.

Another recent example was the case of Sergio M. Del Toro, who has been banned from the securities industry for defrauding a 90-year-old Minnesota nursing home resident of $511,000. Mr. Del Toro recommended that the elderly man put his entire net worth into the stock of a firm called 3rd Dimension, for which there was no market or publicly quoted pricing. Mr. Del Toro's alleged motivation: a 15% commission, equal to about $76,600.

Elder abuse can also take the form of sales of securities that on first blush seem reasonable but are in fact inappropriate. Although FINRA specifically warned brokerages in 2007 against taking advantage of elderly investors, that didn't stop Wall Street from targeting the elderly in 2008 with investments that preyed on their need for liquidity. The most common of these were preferred shares of major financial institutions that offered attractive dividends. (What should an elderly investor's portfolio look like? Read High-Risk Retirement Portfolio Not Always Taboo for insight into this question.)

Sophisticated investors knew that in 2007 and 2008 many banks were teetering on the brink of insolvency. Because the banks needed capital to stay afloat, they increased the dividends on preferred shares, a tell-tale sign of financial distress. Preferred shares of companies like Lehman Brothers (now a part of Barclays (NYSE:BCS)), Fannie Mae (NYSE:FNM), Freddie Mac (NYSE:FRE) and Wachovia (now a part of Wells Fargo (NYSE:WFC) offered dividend payments of more than 8%. Brokers from some of the most recognizable firms in the country pitched these investments to retirees as if they were akin to fixed income instruments, which can provide an ongoing stream of cash for monthly bills.

In many cases, including a number for which our firm represents aggrieved plaintiffs, elderly clients were convinced to sell highly conservative investments, such as bank certificates of deposit, to purchase these supposedly safe, liquid securities. A very common pitch that the elderly investors heard was that Fannie and Freddie were "government backed" so their preferred securities were "safe." In reality, Fannie and Freddie stock was not government backed and the preferred shares were rendered nearly worthless as the market crashed. (For related reading, see Fannie Mae, Freddie Mac And The Credit Crisis Of 2008.)

An implicit "guarantee" is also commonly pitched when brokers attempt to sell what are known as "structured products." These synthetic derivatives carry names like "Principal Protected Notes," implying that the initial investment is safe. We represent retirees who were sold toxic products issued by Lehman Brothers, which, of course, became worthless after the firm collapsed.

Untold thousands of elderly investors lost "irreplaceable money" last year, in what can only be described as a racket. Typically out of the workforce, their only option is to file an arbitration claim against their bank or brokerage. Tragically, most such elder abuse is never reported, and the cases that do come to light often are pursued only after an elderly investor's next-of-kin realizes fraud is involved.

Inexplicably, there is little if any attention to financial elder abuse in the current financial regulatory reform packages. Congress and the White House would be wise to roll into their proposals a modest bill introduced by Sen. Orren Hatch, R-Utah, and co-authored by Sen. Blanche Lincoln, D-Ark. Dubbed the "Elder Justice Act," the proposal centers on advocacy and awareness of "elder abuse, neglect and exploitation at the local, state and national level."

By 2030 one in five Americans will be over the age of 65. At a White House Conference on Aging it was determined that one out of every six elderly people will become victims of financial exploitation. It's very clear that if legislators and regulators do not act quickly, financial elder abuse could become an epidemic.

Related Articles
  1. Credit & Loans

    5 Signs a Reverse Mortgage Is a Bad Idea

    Here are the key situations when you should probably pass on this type of home loan.
  2. Credit & Loans

    5 Signs a Reverse Mortgage Is a Good Idea

    If these five criteria describe your situation, a reverse mortgage might be a good idea for you.
  3. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  4. Credit & Loans

    Guidelines for FHA Reverse Mortgages

    FHA guidelines protect borrowers from major mistakes, prevent lenders from taking advantage of borrowers and encourage lenders to offer reverse mortgages.
  5. Mutual Funds & ETFs

    Top 5 Chinese Mutual Funds

    Learn about some of the most popular and best performing mutual funds that offer investors exposure to the important emerging market economy of China.
  6. Investing Basics

    Explaining Unrealized Gain

    An unrealized gain occurs when the current price of a security exceeds the price an investor paid for the security.
  7. Investing Basics

    Explaining Risk-Adjusted Return

    Risk-adjusted return is a measurement of risk for an investment or portfolio.
  8. Economics

    What is a Code of Ethics?

    A code of ethics is a collection of principles and guidelines an organization expects its employees to follow.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares Agency Bond

    Find out about the iShares Agency Bond exchange-traded fund, and explore detailed analysis of the ETF that tracks U.S. government agency securities.
  10. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Low Volatility

    Find out about the PowerShares S&P 500 Low Volatility ETF, and learn detailed information about this fund that provides exposure to low-volatility stocks.
RELATED TERMS
  1. Principal-Agent Problem

    The principal-agent problem develops when a principal creates ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Security

    A financial instrument that represents an ownership position ...
  4. Series 6

    A securities license entitling the holder to register as a limited ...
  5. Black Money

    Money earned through any illegal activity controlled by country ...
  6. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth ...
RELATED FAQS
  1. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  2. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  3. What percentage of a diversified portfolio should large cap stocks comprise?

    The percentage of a diversified investment portfolio that should consist of large-cap stocks depends on an individual investor's ... Read Full Answer >>
  4. What are some high-profile examples of wash trading schemes?

    In 2012, the Royal Bank of Canada (RBC) was accused of a complex wash trading scheme to profit from a Canadian tax provision, ... Read Full Answer >>
  5. Why should an investor include an allocation to the telecommunications sector in ...

    An investor should include an allocation to the telecommunications sector in his portfolio, because telecom offers an investor ... Read Full Answer >>
  6. What are some mutual funds that do not have 12b-1 fees?

    Some of the most popular and best-performing mutual funds that do not include any 12b-1 fees in the expenses charged to fund ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!