Late last year, Fidelity Investments became concerned that an elderly client in the Atlanta area was suffering from diminished mental capacity and was being taken advantage of by a neighbor. To protect her, Fidelity froze her accounts, which totaled $1.02 million.
Now, Fidelity finds itself fighting a lawsuit brought by the client, Claudine Webb, a 71-year-old widow who claimed that the firm's actions were unwarranted. Without access to her money, she claims she was unable to pay for medical care and could not afford to make home repairs, including a broken water pipe that forced her to use a portable toilet in her home.
While Fidelity slugs it out in court, federal and state legislation, along with new rule changes from the Financial Industry Regulatory Authority Inc., offer financial advisers hope that they may be getting more legal protection when they take measures to safeguard clients from financial exploitation. But not everybody believes these new legal protections will make advisers legally bulletproof.
"I think brokers and firms are walking through a minefield with respect to both the federal and Finra-related rules," said Andrew Stoltmann, a plaintiff's attorney and current president of the Public Investors Arbitration Bar Association. "There are different standards for each one and different steps to secure immunity [for advisers and firms] under each."
Given the country's demographics, advisers will need all the help they can get. On average, 10,000 baby boomers are retiring each day in the U.S., dramatically adding to the number of elderly clients potentially at risk of financial abuse. And as the life expectancy of Americans increases, so does the chance of experiencing some sort of diminished mental capacity. According to the Alzheimer's Association, about 10% of those 65 and older have Alzheimer's disease, making them prime targets for financial predators.
The problem of elder financial exploitation and abuse sits squarely in the laps of financial advisers. Nearly one in five Americans 65 and older has been affected by elder financial abuse, and every year as much as $36.5 billion is lost to financial exploitation, criminal fraud and caregiver abuse, according to a recent survey by Wells Fargo & Co.
A new frontier
Advisers are walking a tightrope. Most want to do the right thing and protect their clients from financial exploitation, but in doing so, they can sometimes become vulnerable to litigation from those same clients, their families and friends.
"Anybody who is successful in this industry has boomer clients or older, so this is the new frontier of client service in a financial advisory model," said Tom West, partner at Signature Estate & Investment Advisors. "How do we address the needs of an aging population? And whose job is it to protect somebody from elder financial abuse? The answer is, it isn't anybody's specific job. That's why the conversation is so difficult. Nobody gets paid to be a specialist in this."
"Broker-dealers don't have physicians on staff," said Elizabeth Loewy, the former head of the elder abuse unit at the Manhattan District Attorney's office and co-founder of EverSafe, a company that helps protects seniors from identity theft and financial exploitation. "They are really between a rock and a hard place. They don't want to be sued by someone for reaching out and trying to determine if a client has dementia or for blocking the money."
In the past, banks and financial services firms would claim that they could not make reports of suspected elder financial abuse because client information is private and confidential. Firms would contact the local adult protective services office and leave it at that.
The new laws and rules give advisers and firms more protection from legal action. The federal Senior Safe Act, signed into law in May, provides a safe harbor for firms reporting senior abuse to regulators if certain criteria are followed. Those include instituting a training program for advisers and designating a supervisor or compliance officer to handle client interventions.
Meanwhile, Finra's new Rule 2165, which took effect in February, allows broker-dealers to place a temporary hold on the disbursement of client funds if they "reasonably believe" financial exploitation is occurring or is about to occur.
The rule allows an initial hold of 15 days and an extension of 10 more days if a review determines that some type of financial exploitation has occurred or could occur.
"Rule 2165 is there to give firms time to investigate," said James Wrona, vice president and associate general counsel at Finra.
"Once the money leaves the firm, it's almost impossible to get it back," he said. "We thought it was important to give firms time to reach out to a trusted contact or adult protective services, but not have the money leave."
Under another Finra rule change, broker-dealers are also required to make "reasonable efforts" to obtain the name and contact information of a "trusted contact person" from a client when an account is opened. For existing clients, those efforts must be made during client updates. According to Finra, this contact person is intended to be a resource for a broker in administering the customer's account, protecting assets and responding to possible financial exploitation.
"We like the trusted contact rule, and I encourage all advisers to do that — banks and credit unions, too," said Ms. Loewy of EverSafe.
"In most of the hundreds of cases I have seen of elder abuse, if there had been a trusted person or family member who got alerts, the fraud could have been shut down almost immediately, at its inception," she said.
Individual state legislatures are providing similar safeguards for advisers. As of January, 13 states had passed legislation patterned on a model law proposed by the North American Securities Administrators Association, and 10 more are expected to follow suit this year.
As welcome as they are, the new laws and Finra's rule changes do not prevent plaintiffs who feel wronged by the actions of an adviser from bringing a civil suit against an adviser and his or her firm.
"We think the laws and rules are a big help and tools firms should use," said Ronald Long, director of regulatory affairs and elder client initiatives at Wells Fargo Advisors. "But you will be sued because either you did or did not let the money out."
David Bellaire, executive vice president and general counsel for the Financial Services Institute, a trade group representing independent broker-dealers, said intervening in cases of suspected diminished capacity and financial exploitation will continue to be a challenge for the industry.
"That can be a tough call," he said. "Clients have good and bad days. And how do you know to distinguish between a loving son becoming more involved in an older parent's life from someone preying on an elder adult?"