As the baby boomer generation reaches retirement age, regulators have increased their focus on protecting senior investors. A new study released by the FINRA Investor Education Foundation (FINRA Foundation), in collaboration with researchers from Duke University and Rush University Medical Center suggests that overconfidence in financial knowledge may lead to excessive risk taking among older investors. This is a good time for your firm to sit down and review your accounts held by elderly clients and determine if their portfolio and investment strategy actually fits their needs.

Identify Your Elderly Clients and Determine There Over Confidence Level

You should start by determining their level of overconfidence in their financial knowledge. This is found by assessing their actual financial knowledge and comparing it against their confidence in their financial knowledge. As people age, their financial knowledge declines, but their confidence in financial knowledge tends to stay the same leading to them being more risk tolerant then they should be. As their fiduciary, you should understand your elderly client’s overconfidence level, and make sure that they are not taking excessive risk. For their age group it is much harder or impossible to recoup losses in their available time frame and a substantial loss could severely impact their financial situation.

Determine Whether They Rely on Their RRs Advice Or Make Their Own Decisions.

If they leave their account to the discretion of their RR, then you need to review the activity in those accounts and make sure the investment strategy is suitable and aligns with the client’s investment objectives. Keep in mind that elderly investors have a shorter time horizon and lower risk tolerance compared to most other investors.

If they make their own decisions for their account, review their activity to check how much risk they are taking on or if there is unusual activity that might point to high levels of overconfidence or mild/severe cognitive impairment. You should also perform checks to ensure they are not falling victim to scams or fraud. Keeping in mind the shorter time horizon and lower risk tolerance for elderly in general, you should do your best to advise elderly clients to stick to these investment objectives and avoid complex or speculative investments and strategies.

Protecting Your Firm

It is important to have policies and procedures in place for when your elderly clients start to show signs of diminishing competence to protect your client and your Firm and avoid the risk of financial exploitation. Consider taking notes or recording your conversations with them, and when it becomes apparent the client is not grasping as much as they were previously, recommend that a family member or other trusted person participates in future conversations. Your Firm should also educate and train its reps on dealing with aging clients and their changing financial needs, physical challenges such as loss of hearing, and identifying trusted persons that might be exploiting your client.

For more information on client suitability and other compliance related topics, Contact us. Our expert team of consultants will help you establish and maintain supervisory programs to identify gaps and ensure you stay compliant with applicable regulation.