The Aging of U.S. Investors and Its Regulatory Implications
The issue of risks posed to senior investors has become a "hot" issue for financial regulators as the aging of the Baby Boom generation may pose special problems for financial professionals and thus for financial industry regulators. Why might this be the case?
The Baby Boom generation owns a considerable amount of financial assets, for it was really the first whose retirement needs were to be covered by defined contribution plans, as opposed to the defined benefit plans of the preceding generation. Moreover, as the Baby Boom generation sells off its housing stock, its financial assets will grow. Since this generation benefits from improved health care, it is likely to be long living and thus its members will be very interested in investing wisely so that their assets can cover their long post-retirement life span.
For financial regulators, this phenomenon presents a perfect storm: an aging, but long living, generation with plentiful financial assets and a great interest in investment opportunities. The basic problem facing the regulators is that the Baby Boom generation will be particularly at risk of abuse from unscrupulous financial professionals.
Professor Fanto writes: The issue of risks posed to senior investors has thus become a “hot” issue for financial regulators. As is typical, the regulators have addressed it at first in a two-pronged way. They have first undertaken investor education, for many Baby Boomers, despite being well-educated, are not sophisticated about finance. One part of the education is to warn seniors about investment schemes and scams directed at them. For example, the SEC recently engaged in a campaign to publicize to seniors that there is no such thing as a “free lunch.” This campaign is in response to the proliferation of investment lunchtime seminars in retirement venues and communities, particularly in Florida. In a typical seminar, seniors are invited to attend a free lunchtime talk about investment products and opportunities. Since seniors have time on their hands and are interested in getting the best return on their financial assets (as well as a free lunch), they are attracted by the seminars. However, at these lunches either bona fide professionals may engage in a hard sale in order to get the seniors to purchase inappropriate investment products or services, or, at worst, the so-called professionals may be scam artists. The second regulatory initiative is to target in their enforcement of the securities laws and regulations investment professionals who prey upon seniors. For example, recently FINRA brought a disciplinary action against a broker who allegedly misappropriated the assets of an elderly woman for his own personal use.
Sometimes, financial regulators take a more proactive role in the regulation of products that are particularly offered to seniors. One recent regulatory focus is on the variable annuity. This potentially complex financial product has both investment and insurance components. It is generally designed to provide its purchaser with income in retirement with death benefits, but the amount of the income will depend upon the performance of investments (investment gains are not taxed) that the investor has selected from a menu of investment options. The upfront sales commissions on these products are significant, and the investor may incur significant penalties and taxes if he or she surrenders the product before its maturity. Moreover, the product may not be suitable for all investors, especially given an investor’s age and tax status.
Brokers are under legal obligations to propose products to investors that are suitable for them. However, given the pressure on individuals to prepare for their increasingly lengthy retirement and the risks posed by purchasing and surrendering variable annuities, FINRA just adopted a new rule to govern the purchase and exchange of variable annuities. Essentially, it requires that a broker make a special suitability determination as to a customer’s purchase or exchange of a variable annuity. In particular, in the case of an exchange the broker must take special care to ensure that the customer is not disadvantaged as a result of the transaction (a broker must pay particular attention to this if the investor made a similar exchange within the preceding 36 months). To enhance the importance of this new Rule, a broker must document in writing his or her atisfaction of its requirements. Moreover, the supervisor of a broker must review the sale and similarly memorialize in writing his or her review and approval. A broker-dealer must also provide special training for its brokers who sell these products. [footnotes omitted]