Wednesday, June 24, 2009

Keeping Your Loved Ones Away From Financial Predators

When it comes to financial predation, the Bernie Madoffs of the world get all the publicity (lucky them). The banality of ordinary financial ripoffs means they get much less press coverage. Most of the chiseling by the financial services industry is just that--snipping off a bit too much in fees here or generating too many commissions there, while putting the investor at undue risk. The losses are often measured in thousands or tens of thousands per client, instead of the millions or more lost by many of Madoff's victims. But this low level snitching, in the aggregate, is big business because numerous people are victimized. Not all financial predation is necessarily illegal. When it is, proof is often difficult to get because the predators target the weak--elderly folks with failing minds, children or impaired adults living on structured settlements or inheritances, or unsophisticated and trusting adults. These people are less able to take care of themselves or serve as witnesses in legal proceedings against the bad guys. So it's important for those who are helping the dependent and weak to be alert to signs of financial predation.

Here are certain typical problems to watch for.

Money shifting from known investment types to the unknown. If your aged parent has, all his or her life, invested conservatively and paid off the mortgage, a sudden change in asset mix to weird, strange, bizarre, incomprehensible or just plain silly investments is a danger signal. Most likely, a sweet-talking money manager has flimflamed your loved one into buying a bunch of high risk assets that pay the money manager large commissions or other income. It's important to understand that most con artists are difficult to spot. The stereotypical fast talker with shifty eyes, a quavering lower lip and too much aftershave rarely succeeds as a crook. Really good crooks are very hard to spot--read up about Bernie Madoff for more on this point. Also see

Money shifting from insured bank accounts to uninsured investments. Folks who are dependent or weak, like the elderly, minors or the mentally impaired, shouldn't have portfolios that resemble a hedge fund's. A goodly amount of federally insured cash is usually in their best interests. If you see an outflow of safe money into uninsured investments, look more closely and find out what's going on. While a young adult in good health might reasonably take some major risks, the weak and dependent need reliability and safety.

Money moving often from one investment to another. When you see your loved one first investing in one thing, and a few months later selling the first and buying another, and a few months later repeating the same pattern, be alert. A money manager may be "churning" your loved one's assets. Churning is a common problem with brokerage firms, where brokers get less sophisticated clients to do a lot of buying and selling of stocks, bonds and other investments, in order to generate commissions for the brokers. In extreme cases, these commissions and poor investment choices can reduce a client's account by half or more.

Unjustified real estate loans (reverse mortgages). While a lot of complex real estate lending (like adjustable rate loans with teaser rates and no money down) has ground to a halt with the collapse of the real estate market, reverse mortgages are still being offered. They offer a way for an older person (62 or older) to borrow against his or her home, and not have to repay the loan until the home is sold, or the borrower permanently moves out or dies. For older people with little liquidity and a desire to stay at home, reverse mortgages may be appropriate. But these loans also involve steep fees that may tempt mortgage brokers to fast talk an older person into taking an unneeded reverse mortgage. The worst scenario is a reverse mortgage where some or all of the loan proceeds are used to buy an investment that pays the mortgage broker a second fat commission. If an aged parent starts looking into a reverse mortgage, try to provide a little skepticism. It may be the right thing for some, but certainly not for everyone. See

Deferred Annuities. An elderly person has little reason to buy a deferred annuity. An immediate annuity (one that begins payments right away) may be a suitable estate planning tool, if it involves half or less of a person's assets. See But a deferred annuity will generally be a terrible idea for someone who is 70, 80 or older. Anyone in that age group who buys a deferred annuity may well have been victimized by a sales person looking for a fat and fast commission. A younger retired person (like age 60 or 62) might reasonably buy a deferred annuity that begins payments at, say age 80, as a way of ensuring that he or she doesn't run out of money late in life. Even then, beware of the fees, withdrawal charges and other costs, especially if a variable deferred annuity is under consideration.

Tax Shelters with tax shelters.
Funds in a retirement account, like an IRA or 401(k), should never be used to buy a tax shelter--such as a deferred annuity. Retirement accounts are already tax shelters. Buying a tax shelter with already sheltered funds generally means the investor needlessly paid extra fees and costs.

Life insurance. Life insurance is usually for parents and other adults with dependents. A dependent or an elderly person isn't likely to have a need for life insurance. Even if there is one reason or another, the cost of life insurance for a 7o or 80-year old will probably be too high to be worth paying. Whole life, universal life or other life insurance that involves an investment feature is highly suspect. These policies are usually costly in terms of fees, surrender charges, etc., and are notorious for having surprise provisions buried in the fine print. If your elderly or dependent loved one all of a sudden develops an interest in life insurance, be skeptical.

It's tough to take care of an elderly person or other dependent. See But it will probably be one of the best things you do in your life. It may end sadly, but you'll have the profound satisfaction of having done the right thing for someone who means a lot to you.

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