By the year 2027, 75 million Americans will have celebrated their 60th birthday. The pool of assets controlled by those aged 50 or older will represent 75% of the nation’s consumer financial assets – a figure approaching $16 trillion.
Clearly, those statistics indicate that a focus on “Senior Wealth” will occur over the next 20 years. A good part of the focus will be on how the financial services industry markets to this emerging group of senior investors. Why the focus? Present data indicates that although individuals aged 60 and older make up only 15% of the population in the U.S., they account for 30% of the fraud victims.
As part of a joint initiative by the S.E.C. and FINRA, the North American Securities Administrative Association (NASAA) announced a coordinated national program designed to protect seniors from investment fraud. It included three components: active investor education, targeted exams to detect abuses and aggressive enforcement of securities laws.
As part of the ongoing initiative, regulators coordinated a series of exams of broker-dealers, investment advisors and other financial services firms that offer so-called “free lunch” sales seminars. Exams were targeted in areas of the country with large senior populations: Florida, Arizona, California, Texas, North and South Carolina and Alabama.
The exams (a total of 110 were conducted during a 14 month period between 2006 and 2007) revealed the following:
- Sponsors of “free lunch” seminars typically offer attractive inducements to increase attendance. Items ranging from door prizes, free books and vacation deals were offered in addition to the free meal – often at upscale venues. All were bids to encourage attendance.
- Seniors were specifically targeted. Seminars often carried names like “Senior Financial Safety Workshop.” There was urgency in the advertising with phrases such as “limited seating.” Seminars would be billed as offering advice by “experts” on how to secure a solid retirement, or offer financial planning or inheritance advice.
- The seminars were designed to sell. Even though some advertisements claimed “nothing will be sold at this workshop,” the seminars were clearly intended to result in the attendees’ opening new accounts and, ultimately sales of products – if not at the seminar itself, then through follow-up calls. The examiners found the most commonly discussed products at these sales seminars were variable annuities, real estate investment trusts, equity indexed annuities, mutual funds, private placements of speculative securities (such as oil and gas interests) and reverse mortgages.
- 57% of the exams found that firms used advertising and sales materials that were misleading or exaggerated or included seemingly unwarranted claims. Additionally, many B-D firms failed to submit their sales materials to FINRA for review, as required by FINRA advertising rules. The most common misleading statements were about the safety, liquidity or the anticipated rate of return of the investments. Examples of sales literature revealed phrases such as: “Immediately add $100,000 to your net worth,” “How to receive a 13.3% return,” and “How $100k can pay 1 Million Dollars to your heirs.”
- 59% of the exams revealed weak supervisory practices of the seminars. A common finding was the firms had not implemented their practices with respect to sales seminars held by their employees.
- 23% of the exams found unsuitable recommendations being made. Advisors conducting the seminars made unsuitable recommendations in light of the consumer’s investment objectives or time horizons.
- Fraud may have been involved in as much as 13% of the exams conducted. These involved potentially serious misrepresentations of risk and return, and, in some cases, sales of fictitious investments.
What did the examiners conclude? While not an all encompassing list, best practices include the following:
- Centralized process for review of seminar materials. This included a dedicated compliance person with proper knowledge of securities laws concerning advertising.
- Policies and procedures covering sales seminars. These often included specific timeframes for submission and review of materials. Materials were forwarded to the home office for review and approval including information on guest speakers at the seminars.
- Written guidance was provided. All those involved in the seminar from the registered representative who conducted the seminar, the branch office manager and other supervisors in addition to compliance staff received guidance that was clear and outlined specifically what was and what was not permissible.
- Standardized materials. Pre-approved, standard materials and advertising were often used. Individual registered representatives were not involved in creating their own materials. The firm also followed a standard outline for the seminar. Materials were also maintained in a central location. A file was created for each seminar and included the following:
- Copy of the approved branch request to host with seminar title, location, date, speakers, etc.
- A list of invitees and attendees
- Copy of any ads
- Copy of any approved marketing pieces
- Copy of any slide presentation
- Supervision. Branch managers were expected to be in attendance for a percentage of the seminars presented by sales people they supervised.
- Mystery shoppers. Employees of the firm were utilized on a random basis to attend the seminars and identify potential weaknesses or compliance issues.
- Certification. All registered representatives were required to certify to the branch manager each month that they had provided all advertisements, sales literature and correspondence items used during the month.
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