Policies | Sample Senior & Diminished Capacity Policy

YOUR FIRM NAME Seniors & Client Diminished Capacity Policy
BASED ON FINRA ARTICLE

Discussion

The number of Americans who are at or nearing retirement age is growing at an unprecedented pace. The United States population aged 65 years and older is expected to double in size within the next 25 years. By 2030, almost 1 out of every 5 Americans—approximately 72 million people—will be 65 years old or older. Those who are 85 years old and older are now in the fastest-growing segment of the U.S. population. At the same time, Americans are living longer than ever, meaning that retirement assets have to last longer than ever, too. Moreover, fewer and fewer retirees and pre-retirees can rely on traditional corporate pension plans to provide for a meaningful portion of retirement needs. Therefore; the financial decisions made by those who are at or nearing retirement are more important than ever before.

As with other investors, levels of wealth, income and financial sophistication vary among older investors. Financial regulators do not have special rules for senior clients. Firms owe all their clients the same obligations and duties. However, in executing those duties, age and life stage (whether pre-retired, semi-retired or retired) can be important factors, and firms should make sure that the procedures they have in place take these considerations into account where appropriate. Two areas of particular concern are the suitability of recommendations to, and communications aimed at, older investors.

Suitability

NASD Rule 2310 requires that in recommending “the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable” for that client, based on “the facts, if any, disclosed by such client as to his other security holdings and as to his financial situation and needs.” The rule also requires that, before executing a recommended transaction, a firm must make reasonable efforts to obtain information concerning the client’s financial status, tax status, investment objectives and “such other information used or considered to be reasonable by such member or registered representative in making recommendations to the client.”

Although the rule does not explicitly refer to a client’s age or life stage, both are important factors to consider in performing a suitability analysis. As investors age, their investment time horizons, goals, risk tolerance and tax status may change. Liquidity often takes on added importance. And, depending on their particular circumstances, seniors and retirees may have less tolerance for certain types of risk than other investors.

Planners cannot adequately assess the suitability of a product or transaction for a particular client without making reasonable efforts to obtain information about the client’s age, life stage and liquidity needs. Other questions to consider include:

Is the client currently employed? If so, how much longer does he or she plan to work?

What are the client’s primary expenses? For example, does the client still have a mortgage?

What are the client’s sources of income? Is the client living on a fixed income or anticipate doing so in the future?

How much income does the client need to meet fixed or anticipated expenses?

How much has the client saved for retirement? How are those assets invested?

How important is the liquidity of income-generating assets to the client?

What are the client’s financial and investment goals? For example, how important is generating income, preserving capital or accumulating assets for heirs?

What health care insurance does the client have? Will the client be relying on investment assets for anticipated and unanticipated health costs?

Planners should carefully consider the risk of a product with the age and retirement status of the client in mind, including its market, inflation and issuer credit risk. Investment involves varying degrees of risk and reward. For many investors who are at or nearing retirement, there can be a temptation to reach for yield to maximize retirement income without the appreciation of the concomitant risk. Moreover, it can be difficult for some investors to fully appreciate the risks of certain products or strategies, particularly if they are concerned about running out of money. Yet, especially when investments involve retirement accounts or lump-sum pension plan payments, taking undue risks with funds needed to last a lifetime can be financially disastrous. Planners do not have an obligation to shield their clients from risks that clients want to take, but they are required to fully understand the products recommended by their registered representatives, to give their clients a fair and balanced picture of the risks, costs and benefits associated with the products or transactions they recommend and recommend only those products that are suitable in light of the client’s financial goals and needs.

This does not mean that all seniors are, or should be, risk-averse, or that any particular product, per se, is unsuitable for older investors. However, certain products or strategies pose risks that may be unsuitable for many seniors, because of time horizon considerations, liquidity, volatility or inflation risk. Therefore, financial regulator’s examiners are focusing on recommendations to seniors, particularly those that involve the following:

Products that have withdrawal penalties or otherwise lack liquidity, such as deferred variable annuities, equity indexed annuities, some real estate investments and limited partnerships; Variable life settlements; Complex structured products, such as collateralized debt obligations (CDOs); Mortgaging home equity for investment purposes; and Using retirement savings, including early withdrawals from IRAs, to invest in high risk investments.

Client’s net worth alone is not determinative of whether a particular product is suitable for that investor, even when the investor qualifies as an accredited investor under Regulation D of the Securities Act of 1933. Over-reliance on net worth is particularly problematic where an investor meets the accredited investor standard based largely on home values, which may represent the largest asset of many senior investors. Simply put, eligibility does not equal suitability.

Communications with the Public

Senior Designations and Credentials

Regulators are concerned about the proliferation of professional designations, particularly those that suggest an expertise in retirement planning or financial services for seniors, such as “certified senior adviser,” “senior specialist,” “retirement specialist” or “certified financial gerontologist.” The criteria used by organizations that grant professional designations for investment professionals vary greatly.

Some designations require formal certification, with procedures that include completion of a detailed and rigorous curriculum focused on financial issues, culminating with one or more examinations, as well as mandatory continuing professional education. On the other end of the spectrum, some designations can be obtained simply by paying membership dues. Nonetheless, seniors may be led to believe that these individuals are particularly qualified to assist them based on such designations.

YOUR FIRM NAME will not allow the use of any title or designation that conveys an expertise in senior investments or retirement planning where such expertise does not exist. It may violate NASD Rules 2110 and 2210. In addition, some states prohibit or restrict the use of senior designations. NASD Rule 2210 prohibits firms and registered representatives from making false, exaggerated, unwarranted or misleading statements or claims in communications with the public. This prohibition includes referencing nonexistent or self-conferred degrees or designations or referencing legitimate degrees or designations in a misleading manner. YOUR FIRM NAME supervises its Planners and assures that they do not violate this requirement.

YOUR FIRM NAME bans the use of any designation that includes the word “senior” or “retirement.”

YOUR FIRM NAME will maintain a list of approved designations, and a registered representative wishing to use a designation not on the list must submit it for review by a committee consisting of principals, compliance officers and/or legal department personnel. Criteria used by committees to review proposed designations include the curriculum, examinations and continuing education components.

YOUR FIRM NAME will refer to outside resources such as FINRA’s database: http://apps.finra.org/DataDirectory/1/prodesignations.aspx.

YOUR FIRM NAME Planners will not work with any third-party vendors that are marketing ghostwritten books on senior investing to registered representatives as tools to establish credibility. Holding oneself out as the author of a book on senior investing, and therefore an expert, could violate a number of rules, including NASD Rules 2110, 2120 and 2210.

High-Pressure Sales Seminars Aimed at Seniors

YOUR FIRM NAME will not use aggressive or misleading sales tactics aimed at seniors, particularly the use of “free lunch” seminars that use high-pressure sales tactics to promote products that may not be suitable for all persons in attendance. We will not use phases such as “limited time offer” or “you have to sign up today” or heighten or exaggerate typical fears of older investors

Diminished Capacity and Suspected Financial Abuse of Seniors

YOUR FIRM NAME Staff will report to the compliance officer clients who demonstrate signs of diminished mental capacity.

YOUR FIRM NAME Staff will report to the compliance officer suspected financial—and sometimes mental or physical—abuse of senior clients by their family members or caregivers. Financial abuse is difficult to define, and therefore, difficult to recognize. In general terms, it is the misuse of an older adult’s money or belongings by a relative or a person in a position of trust.

Red flags can include sudden, atypical or unexplained withdrawals; drastic shifts in investment style; inability to contact the senior client; signs of intimidation or reluctance to speak in the presence of a caregiver; and isolation from friends and family.

YOUR FIRM NAME Staff will take the following steps in dealing with these issues.

The steps include:

Having the compliance department serve as a central advisory contact for questions about senior issues, as well as a repository of available resources.

Having this policy as written guidance to employees on senior-related issues and YOUR FIRM NAME will offer other articles and information on how to identify and/or what to do if they suspect their client is experiencing diminished capacity or is being abused, financially or otherwise, by a family member, caregiver or other third party. YOUR FIRM NAME desires to create a culture of learning on this issue.

Employees are to immediately notify the Compliance Officer if they suspect abuse.

That person in turn must notify the firm’s legal advisor, which may decide that YOUR FIRM NAME should report the suspected abuse to the appropriate state agency; restrict activity in the account and/or take any action necessary to comply with appropriate court orders.

In addition, the firm requires that the contact with the legal counsel be documented in the client’s file in accordance with the firm’s record retention schedule.

The Compliance Officer is to contact local emergency services if immediate physical abuse of a senior investor is suspected.

Asking, either at account opening or at a later point, whether the client has executed a durable power of attorney. (It is easier to have conversations with their clients about such sensitive issues if it is treated as a matter of routine.)

Asking, either at account opening or at a later time, whether the client would like to designate a secondary or emergency contact for the account whom the firm could contact if it could not contact the client or had concerns about the client’s whereabouts or health. (To avoid violating Regulation S-P, YOUR FIRM NAME would have to clearly disclose to the client the conditions under which the information would be used, and the client would have the right to withdraw consent at any time.)

Asking the client if he or she would like to invite a friend or family member to accompany the client to appointments at the firm.

Informing the client (where appropriate) that, in the firm’s view, a particular unsolicited trade is not suitable for the client.

Reminding registered representatives that it is important when dealing with clients, particularly seniors, to base recommendations on current information.

Offering training to help registered representatives understand and meet the needs of older investors, including proper asset allocation, liquidity demand and longevity needs, as well as the possible changes in their suitability profiles.

Some relevant materials are available at www.finra.org and www.saveandinvest.org. Further, some firms have invited representatives from senior-related advocacy groups, the Alzheimer’s Association, and state and local agencies that serve seniors to speak to their employees. Organizations that can help firms locate local experts on senior issues include the National Association of State Units on Aging (www.nasua.org), the National Association of Area Agencies on Aging (www.n4a.org) and AARP (www.aarp.org).

YOUR FIRM NAME will be proactive in helping to educate clients about how to avoid being victims of financial fraud, including making investor education materials, prepared by FINRA, the SEC, state regulators, the firm or another source, available to senior investors.

Conclusion

Given the unprecedented number of investors who are at or nearing retirement age, protecting older investors is a priority for YOUR FIRM NAME. We recognize that seniors are not all alike, and we understand that all investors are entitled to honesty and integrity from their planners.