Senior Investors: A Short Guide to Suitability

Guest post by April Harris, Fordham University School of Law JD Candidate (2015)

With age comes wisdom, and for many older investors, wealth. For some seniors, their “save for a rainy day” approach has paid off such that a lifetime of regular retirement contributions paired with the right holdings has resulted in a healthy nest egg and so, an income stream to help fund their retirement.

And yet, despite their years of experience with investing, seniors are far from immune to fraud, unsuitable recommendations and other forms of financial misconduct by their brokers. In fact, seniors must be especially vigilant when it comes to their investments for two reasons. First, bad brokers frequently target seniors. And second, if seniors suffer substantial losses, they have very little opportunity to make up for the damage.

An October 2013 FINRA press release notes “Americans age 65 and older are more likely to be targeted by fraudsters and more likely to lose money once targeted.”

With this in mind, how can seniors guard against financial fraud, unsuitable recommendations and other misconduct? What should they be mindful of before entrusting their nest egg to a financial advisor?

Risk tolerance is often one big difference between senior citizens and younger investors. For most of us, retirement signals a transition from wage and salary earnings to a combination of monthly payouts (e.g., Social Security benefits and pensions) and invested assets that fluctuate in value, often held in retirement accounts or other tax-advantaged accounts. As we age and eventually retire, we often focus our investment strategy on conservative and stable holdings (e.g., less stocks, more bonds and other fixed-income instruments) that can protect against significant losses in times of market volatility.

So before buying any financial product, an investor—including a senior investor—should ask his or her broker, “Is it suitable for me? Does it fit the goals I’ve set out for this stage of my life?”

“Suitability” is the standard for judging whether a broker’s recommendation is appropriate. FINRA Rule 2111(a) requires that advisors “have a reasonable basis to believe that a recommended transaction or investment strategy…is suitable” for the investor. The rule then lists the factors a broker must consider when recommending an investment product or strategy to the client. These factors include “the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.”

Considering the huge and ever-increasing number of financial products that are available to retail investors these days, what should seniors think about when responding to recommendations from their financial advisors? Three crucial considerations are liquidity, length and life expectancy: what we can think of as the “3 Ls.” These three factors are a good starting point for seniors who are serious about protecting their portfolios from investment fraud and unsuitable recommendations that might subject them to dangerous market volatility:

Liquidity

  • Remember, retirement signals an income shift from wages or salary to assets, so seniors should be wary of any products with limited liquidity.
  • Inquire about “early withdrawal” penalties or any other limitations on accessing the assets.
  • Ask Your Financial Advisor: How easy is it to access these funds without incurring fees once I buy this product?

Length

  • Generally, long-term gains are taxed less severely than short-term gains and a good financial advisor considers the client’s tax status when making investment recommendations.
  • Ask Your Financial Advisor: What should I know about the tax implications of this product?

Life Expectancy

  • Seniors typically want products that will yield returns within a reasonable amount of time.
  • Ask Your Financial Advisor: How long should I expect to wait before I will see a return on this investment?

This is just an introduction to some considerations that older investors ought to keep in mind when evaluating investments that their financial advisors recommend. Seniors should both do their own research and have frequent, in-depth conversations with their financial advisors and accountants to be sure they understand and are comfortable with their investment portfolios.

One final thought for senior investors (and investors of any age, really): Ask yourself, “Can I explain every product in my portfolio in plain English?” If not, it’s time to ask some hard questions of your broker and if after those conversations, you still cannot, you should consider dropping those investments that you cannot explain from your portfolio. The last thing senior investors want is an unpleasant surprise in their portfolios, particularly one that could have been avoided by asking some hard questions before investing.

If you have suffered substantial losses to your retirement account while following your financial advisor’s recommendations, please contact a securities attorney at The Law Office of Kevin Galbraith at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.