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How Advisors Can Effectively Protect Clients From Scams

Amid an uncertain and vulnerable economic climate, financial advisors need to make sure clients are informed and protected now more than ever.

Scamming is a growing and major epidemic plaguing many Americans. Seniors lose up to $2.9 billion every year to scams designed to target older investors and prey on their vulnerability. With these numbers steadily rising, financial advisors need to be educated and proactive about how they can protect their clients from possible detrimental scams.

The Rise of Scams

Financial scams have become so rampant that you could call it the crime of the 21st century. Unfortunately, the conviction rate of offenders remains abysmal and recovery of assets even rarer due to the lack of a paper trail. Shockingly, 60% of scammers are family members.

In the coming decades, fraudsters will have a larger elderly population to victimize, with projections indicating 78 million people over 65 living in the U.S. by 2035. About 20% of this demographic have cognitive impairments, making them prime targets for scam artists.

The prevalence of this crime makes it vital that financial advisors stay up to date on how to best help clients avoid becoming a scammer’s next victim.

FINRA's Stance Against Financial Exploitation

Scams often require victims to request funds from their financial advisors. To aid fraud prevention, the Financial Industry Regulatory Authority created regulations requiring financial advisors to monitor client accounts for alarming red flags.

Congress contributed to this effort by passing the Senior Safe Act, which bolsters education for financial professionals about how to spot common senior-targeting scams. The act also shields financial advisors from liability if they temporarily freeze accounts or contact authorities because of suspicious activity.

In 2018, FINRA additionally mandated that financial advisors ask clients to assign an emergency contact in case fraud red flags are detected on their accounts. The emergency contact must be a trusted person, such as a responsible adult child.

Top Scams to Inform Clients Of

Common scams the Senior Safe Act seeks to raise awareness about include the following:

IRS impersonators – In 2019, over 2.4 million Americans fell victim to fake IRS demands for money, costing a collective $72.8 million. Scammers use fear and intimidation to convince victims they will be charged late penalties, lose their homes or suffer other drastic consequences if they refuse to turn over a large sum of money immediately.

Robocalls – Fraudsters use fake phone numbers to make international robocalls look like legitimate domestic communications. They induce targets to give up personal information, such as bank account or Social Security numbers.

Sweepstakes scams—Although scammers make "winning the sweepstakes" sound sweet, these are commonly aimed at seniors. The caller informs the target they won but must also pay taxes and fees before receiving the winnings.

Grandparent games—In one of the most diabolical scams, fraudsters impersonate the victim's grandchild. The scammer spins a tale of woe, such as being in prison or trapped in a foreign country, and begs the victim to send money by Western Union or another service.

Phony Social Security calls—By pretending to be an employee of the Social Security Administration, the scammer tries to get the mark to reveal private information, including Social Security number, birthdate or mother's maiden name.

Lawsuit lies—Scammers call elderly victims, pretending to be with a government agency, law enforcement agency or attorney's office, and demand money in exchange for dropping a charge or lawsuit.

Identity theft—In 2018 alone, scammers used identity theft to swindle 1.4 million people out of $1.4 billion.

Inform, Educate and Protect

Scam artists don't quit because their crimes often succeed and are very lucrative and difficult to detect. Financial advisors can help clients avoid being victimized by educating them about scam techniques and the psychological strategies scammers often use.

Most con jobs come down to a three-step process: gain trust, make promises and create fear. Because well-designed cons play on emotions, even educated and intelligent people can be taken in.

Take the sweepstakes scam. The caller first establishes trust by using a fake phone number and an authoritative tone. They then promise a tempting prize. Finally, the scammer demands money up front. For the scam to work, the target's fear of missing out on the sweepstakes prize must override any doubts about the caller's legitimacy.

Dos and Don'ts for Clients

  • Do plan ahead—Financial advisors need to create a proper plan to help clients protect assets.
  • Don't give personal information—A good rule of thumb is to tell your clients to never give personal information out over the phone.
  • Don't rush—Time kills all cons. Tell your clients that if someone puts them under a time crunch, refuse to make hasty decisions. Get the facts and consult trusted sources.
  • Do form a secure relationship—A rock-solid relationship between financial advisor and client creates a strong barrier against fraudsters.
  • Don't be afraid to say no—Make sure you client never says yes out of fear.

Scam artists routinely rely on a limited set of psychological tricks and change the details to keep their acts fresh. Even The Wizard of Lies, Bernie Madoff, used the same three-step process: build trust (his impeccable reputation and stature), make promises (the unbelievable returns from his investment fund) and create fear (convincing victims that questioning or hesitating means missing out).

By being proactive, educating your clients about scams and taking action when red flags appear, you can protect them from the grifters.

Brandy Purcell is the director of regulatory affairs compliance of USA Financial.

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