The Financial Industry Regulatory Authority ( FINRA ) , created by the consolidation of the NASD and parts of the New York Stock Exchange, is the new cop walking the Wall Street beat. Recently, FINRA raised an alarm over investment sales practices to seniors and those in or nearing retirement. In a Regulatory Notice to members, they note that the number of Americans who are at or nearing retirement age is growing at an unprecedented pace. At the same time, Americans are living longer than ever, meaning that retirement assets have to last longer than ever. Moreover, fewer and fewer retirees and pre-retirees can rely on traditional corporate pension plans to provide for a meaningful portion of retirement needs. This means it is most important for those who are at or nearing retirement to make sound financial decisions.
FINRA has taken a number of steps to ensure that securities firms are using appropriate sales practices in their dealings with seniors and individuals nearing retirement. Among these steps are regulatory sweeps, disciplinary actions, Investor Alerts to educate the public, and a Regulatory Notice to their member firms “reminding” them of their obligations when selling investments to seniors and those investing for retirement. While FINRA does not have special rules for these customers, they note that in fulfilling their obligations to the investing public a person's age and stage of life are important factors brokers must take into account when recommending an investment to seniors and those investing for retirement.
In this recent Regulatory Notice FINRA raised two areas of concern. The first of these is the suitability of investments recommended to these investors. 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 customer, based on "the facts, if any, disclosed by such customer 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 customer'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 customer."
Although the rule does not explicitly refer to a customer's age or life stage, both are important factors to consider in performing a suitability analysis. The Regulatory Notice noted that, as people age, their investment time horizons, goals, risk tolerance and tax status might change. Liquidity might become more important. Some seniors and retirees may have less tolerance for certain types of risk than other investors. For example, those living on fixed incomes are more vulnerable to inflation risk than others who are still working. Also, older investors have a shorter time horizon so might not have the opportunity to recover investment losses over time.
Firms do not have an obligation to shield their customers from risks that customers want to take, but the firms are required to fully understand the products their brokers recommend, to give their customers 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 customer's financial goals and needs.
FINRA warns that firms cannot adequately assess the suitability of a product or transaction for a particular customer without making reasonable efforts to obtain information about the customer's age, life stage and liquidity needs. Some questions they should ask of the customer include:
► Is the customer currently employed? If so, how much longer does he or she plan to work?
► What are the customer's primary expenses? For example, does the customer still have a mortgage?
► What are the customer's sources of income? Is the customer living on a fixed income or anticipate doing so in the future?
► How much income does the customer need to meet fixed or anticipated expenses?
► How much has the customer saved for retirement? How are those assets invested?
► How important is the liquidity of income-generating assets to the customer?
► What are the customer's financial and investment goals? For example, how important is generating income, preserving capital or accumulating assets for
► What health care insurance does the customer have? Will the customer be relying on investment assets for anticipated and unanticipated health costs?
The second area of concern is with firms' and broker's communications with the public. The first issue raised is with false or misleading designations and credentials that suggest an expertise in retirement planning or financial services for seniors. Some of the designations FINRA found in their investigations include: "certified senior adviser," "senior specialist," "retirement specialist" or "certified financial gerontologist." While some designations require formal certification requiring extensive course work and testing, others 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.
FINRA warns that NASD Rule 2210 and NYSE 472 prohibit firms and registered representatives from making false, exaggerated, unwarranted or misleading statements or claims in communications with the public. This prohibition includes references to nonexistent or self-conferred degrees or designations or references to legitimate degrees or designations in a misleading manner.
The next issue FINRA raises is the use of aggressive or misleading sales tactics aimed at seniors. Seminars are a popular and good way to meet prospective customers. It must be said upfront that the vast majority of them are legitimate and provide valuable information to the attendees.
However, of particular interest to FINRA are "free lunch" seminars that use high-pressure sales tactics to promote products that may not be suitable for all attending. Investors frequently get invited to free seminars that promise to educate them about investing strategies or managing money in retirement; often with an expensive meal provided at no cost. According to a recent FINRA study, four out of five investors age sixty and above got at least one invitation to a free investment seminar in the past three years. Nearly twenty-five percent of all those investors said that they went to at least one such seminar in those three years.
In addition to the Regulatory Notice, FINRA has issued an Investor Alert warning investors of the dangers of illegitimate "free lunch" seminars. Securities regulators recently conducted more than one hundred examinations involving free-meal seminars. In half the cases, the sales materials, including the invitations and advertisements for the events, contained claims that appeared to be exaggerated, misleading or otherwise unwarranted. Twelve percent of the seminars appeared to involve fraud, ranging from unfounded projections of returns to sales of fictitious products.
FINRA advises all seminar attendees to be familiar with the basic persuasion tactics and influence techniques that sellers, both legitimate and not-so-legitimate, use. These include:
► The “Phantom Riches” technique; where wealth or security is tangled under the prospect's nose. You will hear pitches such as "These gas wells are guaranteed to produce $6,800 a month in income."
► The Source Credibility technique; where the salesman builds credibility by claiming to be with a reputable firm or to have a special credential or experience. You will hear pitches such as "Believe me, as a senior vice president of ABC Firm, I would never sell an investment that doesn't produce."
► The Social Consensus technique; which leads people to believe that other savvy investors have already invested. You will hear pitches such as "This is how “John Smith” got his start. I'm in this investment and so are my mom and half her church."
► The Reciprocity technique; which provides something, such as a meal or a prize, that makes you feel obligated to reciprocate.
► The Scarcity technique; that creates a false sense of urgency by claiming limited supply. You will hear pitches such as "There are only two units left, so I'd sign today if I were you."
FINRA suggests any seminar attendee check out the speakers, the sponsoring firm and the products being sold before they attend a “free lunch” seminar. Never invest on the spot; savvy investors refuse to be rushed. More than ever before, investors, especially seniors, retirees, and those investing for retirement must investigate before they invest.