Financial Risks For Retirees

Dear Accounting Professor:

I recently retired and want to know about the risks that I might encounter during my retirement years. What should I be concerned about as a new retiree?

Concerned, but Retired


Dear Retired,

Unfortunately, retirees are very susceptible to fraud. Based on the research that I have read, those who have health issues and those who are very dependent upon one or a small group of people to meet their needs are at risk of being defrauded. Unfortunately, as we age, we are forced to trust people that we would not otherwise interact with because of our own developing health needs. My opinion is that these experiences in the medical setting condition people to let their guards down and trust unknown people more even when they are outside of the medical environment. This increase in trust levels makes us more vulnerable to becoming victims of fraud.

Also, retirees who have their financial matters on autopilot are also at a higher risk of becoming victims to these schemes. They simply do not know what is happening with their finances and that makes it easier for a bad actor to trick them into making decisions that are not in the retirees' own best interests.

To complicate this process, both legitimate and nonlegitimate financial salespeople may propose investment opportunities for you to consider. Unfortunately, those who are not legitimate are most likely promoting an investment opportunity illegally or attempting to make you a victim of their fraud (my money is on the last option). With legitimate financial salespeople, many are incentivized on a commission basis with more significant compensation being offered to promote investment options that are not in the retirees' best interests. In other words, the financial salesperson's self interest often supersedes their prospective client's best interest.

This scenario often plays out with the salesperson's own self interest winning at the expense of the retiree's best interests. To address this, some states have imposed regulations on these relationships that are very difficult to proactively enforce. For example, New York requires sellers of life insurance and annuities to make recommendations in the best interests of their clients and not consider their own incentives for promoting alternatives. (See https://www.barrons.com/articles/insurance-group-sues-new-york-over-best-interest-rule-1543348657 as an example. Of course, the sellers sued the state to have the law invalidated and they eventually lost. In the end, it is still near impossible to proactively enforce.)

With legitimate financial salespeople, I perceive that disclosure fraud is the primary method used to convince people into making a less desirable investment. Examples of this include failure to disclose the downside risks in terms that a layperson could understand and emphasizing only the upside and doing this entirely verbally instead of in writing. Many of these promoters manipulate people into making decisions emotionally and/or place pressure on them to do so quickly instead of rationally thinking through their decision and having time to obtain a second opinion.

The financial services industry is partially to blame for this environment because they create and promote new investment schemes that are often not good for most investors. These new schemes certainly are difficult for most investors to understand, which is a contributing factor to many of the financial bubbles busting and stock market crashes. Many people simply do not understand all of the various financial vehicles that are available to them. As a result, they trust their financial salesperson to make sound recommendations to help them achieve their goals.

To mitigate your risks of making an investment that is not in your best interests, I recommend that you ask the following four questions:

1. Are you licensed? If so, what are those licenses, what organization issued them, and what do those licenses allow you to do?

These questions need to be followed up with actually verifying that these licenses are current and that the licensee has not been disciplined by regulatory organizations before moving on to question

2. What is your academic background?

The point of this question is to identify formal training that the salesperson had that should be related to the line of work for this salesperson. Before moving on to question 3, one needs to check these schools to see if they actually existed at some point and were appropriately accredited (and are not some diploma mill or fake degree program). One should also look for external verification of the information provided as this should be readily available on the website of every financial sales organization's website and other websites outside of the direct control or influence of the salesperson

3. Before I make any decisions, are you willing to send your advice and recommendations in writing to me?

The point of this question is to get their advice and recommendations in writing before making such a decision. This builds decision-making time into this process and allows time for a decision-maker to seek a second opinion.

4. If I make this investment decision, how do you benefit and what will that compensation be? This needs to be in writing.

The transparent and more trustworthy salespeople are salaried with no sales commissions involved. Those receiving a sales commission should be willing to tell you exactly what they will receive either as a percentage of the transaction or the actual dollar amount and they should share their financial incentive for each of their recommendations.

If you ever have any questions about a potential investment opportunity, you should always seek a second opinion from someone who is NOT affiliated with the organization that is promoting the opportunity to you. For example, you can speak with a Certified Public Accountant (CPA) at an independent registered public accounting firm about your situation before making a decision to invest.

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