This is the second in a 3-part series on the financial abuse of elder citizens.
There are certain investment products or investment strategies that present risks fundamentally too great for many seniors. It is tempting for investors and advisers alike to overreach and buy investment products with a higher potential yield in today’s low interest rate environment. However, FINRA warns that these products that are structured tend to be derivate-based and not only pose risks, but also function in terms few investors or advisors are able to grasp fully. Moreover, a higher risk means a higher risk that there will be a loss of the principal as no investment with a high yield can be considered safe.
Many products, like non-traded REITs, limited partnerships, variable annuities, and equity indexed annuities, also have certain restrictions on withdrawal and certain penalties. They also lack liquidity. According to FINRA, senior investment in products with high risk to principal is unsuitable in almost every instance.
Offerings classified as Private (Reg D) also create a danger zone when it comes to senior citizen customers. These type of private placement offerings are only meant to be sold to eligible “accredited investors,” including among other things, those whose net worth tops $1 million. Constantly high-risk, these investments do not provide liquidity or transparency, and the risks involved are often not properly represented or omitted entirely. Selling agents do not always disclose the risks of these investments, and often rely of printed materials that are confusing and difficult even for experts to understand. In fact, many of these types of offerings are known to have turned out to be “Ponzi” schemes. The key to note here is that suitability and eligibility are not interchangeable and consequently, Private (Reg D) investments tend to be outright unsuitable for the majority of investors, and all the more so for fixed income retirees.
FINRA’s concern regarding investment suitability also pertains to the investment assets of certain pension plans, especially those involving relatively new or volatile securities, including niche exchange traded funds, equity tranches of collateralized mortgage obligations (CMOs), synthetic (i.e. based on derivatives), leveraged and inverse leveraged exchange trade funds, and exchange traded funds.
Many newer financial products that have been made available to consumers are exceedingly complex and carry with them a series of associated complex risks. These risks are very difficult for the average retail investor to understand. Consequently, FINRA has cautioned that even those customers considered institutional and to have the general proficiency to evaluate risk may be unable to appreciate a certain instrument, particularly a new product or one with notably different risk and characteristics of volatility than other standard investments. It goes without saying that a FINRA warning about the inability of both pensions and other institutional investors to understand Wall Street’s new products speaks to the need for individual investors to steer clear, or precede with great caution around this type of investment product.
In section three of this series on elder financial abuse, we continue our overview of the subject with a look at several key warning signs regarding the emergence of a potential problem with financial investments that are recommended to senior citizens.
If you believe that you may have been taken advantage of as a senior customer and may be the victim of elder abuse regarding unsuitable investment strategies, contact Daniel Carlson at the Carlson Law Firm today for a free consultation at 619-544-9300.
