BOSTON – Older Americans were not born yesterday. But that doesn't mean retirees and soon-to-be retirees aren't vulnerable to scam artists intent on separating them from their money with promises of free lunches and guaranteed returns.
In fact, federal regulators and others say older Americans — 10,000 of whom will turn 60 every day over the next 20 years — are perhaps the most vulnerable of all groups to nest-egg robbers. So regulators, lawmakers and consumer advocates are stepping up efforts to protect this group from losing their life's savings to scoundrels.
The U.S. Senate Special Committee on Aging this week held hearings on how seniors can stop investment fraud.
And SEC Chairman Christopher Cox last week said the nation's top stock cop is stepping up efforts to thwart scam artists as well as educate older Americans about investments.
Chief among the SEC's efforts? The agency, which began collaborating with state and other regulators to identify firms that may be preying on seniors in California, will now turn its attention to Florida, the state with the largest percentage of Americans 65 and older.
Specifically, the SEC, the NASD, the Florida Securities Commission and others will start examining broker-dealers and advisers and the "ubiquitous marketing vehicles that lure seniors to sales seminars — often at fancy hotels and restaurants — with promises of the proverbial 'free lunch,'" Cox said in his statement.
Don Saxon, commissioner of the Florida Office of Financial Regulation, says regulators will conduct a series of on-site exams of Florida brokers and advisers and the employees who conduct seminars.
And if regulators find that instead of a legitimate sales seminar and a free meal seniors are being exposed to high-pressure pitches for unsuitable products, wild claims about projected returns and no disclosure of the actual risks of an investment, well, woe to the scam artist. "We'll move in hard and fast," Cox said in a speech last week to the Consumer Federation of America.
Seniors need not, however, wait on the SEC and others to stamp out scammers. In fact, seniors can and should do all they can to protect themselves against scammers — especially the clever ones, and they are clever. Here's what's recommended:
Don't Attend 'Free Lunches'
First there's the issue of free lunches and whether older Americans should attend such seminars at all. On one hand, free lunches are rarely anything for scammers but a chance to find the next fool and his (or her) money. "The SEC's experience thus far tells us that these sales pitches are anything but 'free,'" Cox said. "They come with a very high cost."
Saxon, meanwhile, says seniors need not automatically rule out grabbing a bite to eat courtesy of this or that broker or adviser. "There is nothing wrong with a free lunch." What's wrong, however, is when the adviser or broker puts on the hard sell, making unsuitable recommendations and failing to disclose risks associated with specific investments, including equity-index annuities, viaticals and life settlements.
Saxon says seniors who attend a free lunch in which investments seem unsuitable or risks are disclosed should immediately contact their state securities regulator or regional SEC office. Older Americans intent on going to a free lunch should check with federal and state regulators to determine if the company and people running the lunch are clean, said Saxon.
Indeed, investors would be well served if they never took the word of promoters at face value unless returns and promises can be corroborated by an independent source, such as audited financial statements. In addition, experts such as Barry Minkow, the former scam artist who testified before the Special Committee on Aging, recommend against doing business with organizations dominated by a single person who is accountable to no one.
Of course, older (and younger) Americans don't always know whether investments are unsuitable or when risks are being disclosed. That's why the real first order of business for seniors searching for yields in some of the wrong places is an education. And one of the best places to start one's schooling is the SEC's new Web site for seniors.
The site features information about products such as promissory notes, callable CDs and ultra-short bond funds and about tactics such as cold calling and affinity fraud that can help seniors and their families avoid fraud.
The SEC also says it's important that seniors assess their risk profile as part of the education process. If one knows their tolerance for risk, be it inflation risk or market risk or some other type of risk associated with investments, they stand a much better chance of knowing whether an investment is suitable or not.
Minkow agreed that education is a must. "Fraud is the skin of the truth stuffed with a lie. This is why it is hard for the elderly and other investors to identify it," he said in a statement. "Successful education to the elderly in the area of financial-fraud prevention must equip people to peel away the mask (skin) and look underneath (the stuffed with a lie component)."
Seek Out Second Opinions
Saxon says seniors should seek out second and third opinions from trusted advisers, family and friends about investment opportunities. Indeed, Minkow said one of the things scam artists fear most is critical thinking. "We want people to make investment decisions into our 'deals' subjectively rather than objectively," he said.
The best ways to suck people in? Show them how a close friend or relative has been receiving large returns monthly for extended periods of time. Make sure the prospective investor has little or no knowledge of the industry they are contemplating an investment in so they can't ask critical questions. Compare the huge potential returns of the scam investment with the underachieving returns of the victim.
Minkow recommends using what he calls the normally and regularly test. Investors need to ask questions that begin normally and regularly do people get xyz returns or make xyz profit margins.
"When investors approach an opportunity, decisions to invest must be made objectively while applying critical thinking," said Minkow. "And we who perpetrate fraud cannot stand people who apply critical thinking to our deals."
What's more, he says investors should be willing to walk away from scam artists who use come-back tactics like "well, I've got a lot of happy investors so your loss."
Hang Up on Cold Callers
In addition, he says seniors should get in the habit of hanging up on cold callers. "If something is such a good deal you have to question why someone is calling you, why you are the chosen one," says Cox. "You have to question why they are not keeping it to themselves."
Robert Powell is editor of Retirement Weekly — a MarketWatch/Dow Jones service — author of "20 Tips for Retirement Investors" and co-author of "Decoding Wall Street." He is also developing two personal finance series for public television and is presently serving as expert faculty at California Lutheran University's California Institute of Finance.
Copyright (c) 2006 MarketWatch, Inc.