The Silent Epidemic

Barron's, Reshma Kapadia

Parents hope their children will get along, but probably not like this. For years, a retired couple—we'll call them Bob and Sue—financially supported two of their seven adult children. The two daughters were divorced and helped care for their aging parents, who lived in the Washington, D.C., area. But when the couple developed dementia in their 80s, the sisters didn't alert their far-flung siblings about their parents' deteriorating condition. Instead, they began to sell stock and write themselves checks, spending $700,000 over four years on vacations, cars, and down payments.

They were one of those families that didn't talk about money. It took a $100,000 capital-gains tax bill to alert the other siblings to the size of the estate—$4 million—and the scope of their sisters' self-dealing. "The daughters felt they deserved every dollar and never looked at it as stealing," says Tom West, a financial advisor and partner at Signature Estate & Investment Advisors, who was involved in the case.

It's a scenario that financial advisors see all the time—yet often are unable to talk with family to help their clients. Retirees think it won't happen to them. And no one wants to discuss it when it does.

But an estimated one in five older Americans have been financially exploited. Sometimes it comes in the form of scams, such as strangers posing as agents from the Internal Revenue Service or the Securities and Exchange Commission. The majority, though, comes at the hands of family members, friends, or caregivers improperly using a retiree's money. Whatever its form, financial exploitation is preventable, but first you must acknowledge it's a risk.

And the more money you have, the greater that risk. Just look at the cases of philanthropist Brooke Astor and actor Mickey Rooney; both fell victim to what prosecutors, regulators, and financial advisors call "the silent epidemic." Shame, denial, and fear keep victims from speaking up. A recent New York State study found that only 2% of cases were reported by the victims themselves, contributing to its estimate that as few as one in 44 cases are reported.

It is seniors' wealth—$18 trillion in the hands of those 65 and over—that makes them such a popular target. "People who want to scam look where there are significant assets," says Susan Axelrod, who oversees enforcement and fraud detection at the Financial Industry Regulatory Authority.

But the affluent are at risk not only because of the size of their portfolios, but also because they're more likely to live longer than the nonaffluent. Nearly half of the people who reach age 85 have measurable cognitive impairment. "Wealth is the best predictor of health and longevity," says Dr. Jason Karlawish, co-director of the Penn Memory Center, who says the risk of developing a disabling cognitive impairment goes up significantly after 70. What's more, financial advisors warn that big portfolios can tempt family members eager to get their inheritance but stymied by mom's and dad's longevity. More than half of advisors in a survey by the CFP Board reported working with an older client subject to financial exploitation.

AARP found that financial exploitation by family members involves larger sums than those by strangers. It's also the type that advisors tend to see. A survey last fall by Merrill Lynch Wealth Management found that a child was the suspected perpetrator 71% of the time. Lawyers often see a child use the death of a parent to push for a larger take, or exert undue influence. "The justification is, 'Mom is 85 and has $700,000 and doesn't really need it,' but then she lives to be 102," says Richard Milstein, who handles high-conflict, complex trust and probate issues at law firm Akerman.

Financial abuse by family members is particularly vexing. It often starts small and sometimes even with some knowledge by the elderly family members. Egregious instances of bad behavior certainly abound, such as when Astor's son, Anthony, took advantage of his wealthy mother's Alzheimer's to convince her she was out of money. He then used his power of attorney to fire her longtime butler and keep friends away as he stole tens of millions of dollars—until his own son discovered the abuse. But many problems take a long time to surface because they are less clear-cut, such as when a daughter quits her job to care for an aging parent and helps herself to money to pay her bills without notifying siblings or having her father understand how those withdrawals jeopardize his retirement security.

What steps do you need to take to prevent this? Transparency is everything. Wealthy parents need to continually evaluate how much they're willing to give to their children and make it clear to everyone involved what portion of the money is compensation, support, or an advance on an inheritance. Take a recent case in which a mother helped support an adult daughter who cared for her. The daughter became accustomed to her $30,000 annual gift, and even when a home health-care aide was brought in, she kept drawing that amount—as compensation for supervising the care. One sister didn't see it as untoward, but a brother saw it as financial abuse.

When parents avoid talking to their children about who they are giving money to, and under what circumstance, the stage can be set for exploitation. "Families stumble into borderline financial elder abuse. It starts with good intentions but goes unchecked over time. People don't know where to draw a line," West says. His guidance: "The moment you don't want to tell your brother is a signal that it's probably not cool."

Then there are the less tangible costs. "One incident can wipe out an entire lifetime of planning, and leave a parent traumatized and forced to choose situations they would never have considered. It has a devastating effect and boosts morbidity," says Edwin Walker, acting assistant secretary for Aging at the Department of Health and Human Services, the federal agency that supports Adult Protective Services, which investigates elder-abuse reports.

THERE ARE REAL, physiological reasons that make people more susceptible to financial fraud as they get older. Aging creates natural changes in the neurons in our brain, affecting cognition to varying degrees. The most prominent changes involve fluid intelligence, which is the ability to think fast, process new information, and multitask. As people age, there is also a tendency to focus more on potential reward than potential risk. At the same time, the insula, the part of the brain that notes when something is amiss, becomes less active, says Dr. Mark Lachs, director of geriatrics for the New York Presbyterian Health System.

That's why awareness, and advanced screening of possible red flags, is paramount. "This is an absolute epidemic. You don't need Alzheimer's or another neurological problem to be vulnerable," Lachs warned brokers at a financial industry conference last month. "Twenty years from now, we will look back on our failure to protect the assets of vulnerable older adults with astonishment—in much the same way we look back on allowing 8-year-olds to work in factories and doctors to sell their patients cigarettes."

Financial management is cognitively demanding, and it's often the first daily activity to get hit. A study by Harvard professor David Laibson and his team found that financial capability peaks at 53, when robust cognitive ability and substantial experience intersect. Experience can offset cognitive declines to an extent, but less so when someone is tackling new tasks—which retirees regularly face as they begin to spend their nest eggs.

Add to that a resistance to asking for help—or an unwillingness or inability to find unbiased help—and a robust portfolio can quickly turn paltry.

Loneliness and social isolation are other big risk factors. Unlike those with limited resources who may need to live in group settings, the affluent can often afford to live independently and hire care, potentially increasing that isolation. In some cases, a family member subtly isolates a retiree from other family members. Kerry Peck, managing partner of Peck Ritchey in Chicago, who litigates estate and trust cases, says a common scenario he sees in his practice involves one child assuming the responsibility of taking mom to church or cooking her dinner, and then pressuring her to favor the child in an estate plan. That pressure often comes with the child bad-mouthing siblings, or not delivering messages about other siblings checking in on her or wanting to visit.

Isolation can also lead to out-and-out scams. These tend to start slowly, but can build to big figures. AARP estimates that exploited seniors lose an average of $120,000. But experts note that may be grossly understated, given the underreporting of abuse.

Scams perpetrated by strangers come in many forms. Just last month, agents of Homeland Security, the Internal Revenue Service, and the Treasury Department took down an international scheme that claimed to collect back taxes. There's also the popular "grandparent" scam, in which a criminal capitalizes on hearing difficulties to impersonate a grandchild in trouble who needs money immediately. Persistently low interest rates have opened up retirees to scams because investors are more tolerant of taking risk for yield, which could make them more willing to listen to a pitch, says Lori Schock, SEC's director of Office of Investor Education and Advocacy. A popular scam sells investors promissory notes guaranteeing returns of as high as 8% for the next 30 years…all for a $100,000 investment.

Fraudsters also prey on those in mourning, finding them online or in person at a place of worship. Financial advisors say they often see a recent widower suddenly bringing a new friend along to check on stock portfolios. When that "new friend" becomes a spouse, matters can get more complicated, but states are taking notice. Florida now allows marriages to be annulled if there's proof that fraud was involved in the relationship or a senior has been exploited or is vulnerable—even if there isn't dementia. The Illinois Supreme Court recently authorized guardians to seek divorces on behalf of seniors who have been exploited.

Emily Cardin's mother, Lucy, fell prey to a romance scam online. The interior designer for a high-end New York City furniture store was on track for a comfortable retirement. She had always been careful—in money and love. At the age of 65, she came across an online-dating profile of Richard, a religious, New York–based British businessman currently on a project in Africa, and thought she had found her match. The relationship blossomed over several months, with online chats, Bible study, and occasional calls before Richard told Lucy he wanted her to retire and marry him when he returned stateside. Only one problem: Richard was fictional, created by scammers who used Lucy's digital footprint to reel her in.

But Lucy wouldn't hear any of the evidence Emily dug up to prove that he was bogus, from the phony New York address to his picture appearing on multiple dating profiles. Instead, she took assurance from the fact she had contacted him first. Eventually, "Richard" suffered a tragic accident and asked Lucy for $60,000 for hospital bills that he vowed to repay once he could tap his overseas accounts. He disappeared a couple of months later, but Lucy still denied the fraud. When a man contacted her several months later and said he could help recoup her money for a fee, she fell for it. By the time it was all over, she had lost her house and nest egg. "It was like a gambling addiction. She felt like she needed to come out ahead and figure out a way to not have lost everything," Emily said.

Lucy's experience is typical, with victims often hit repeatedly as scammers sell their names to others and capitalize on the willingness of those who have suffered a loss to take more risk to get whole. The criminals are adept at pushing the right buttons, including addressing the invisibility some retirees feel after leaving high-powered jobs. Take investment scams, whose victims are largely college-educated, financially literate men. These are folks who have spent decades calling the shots and following their gut, in their portfolios and their businesses, with great success. But that also makes them less likely to check if an investment or advisor is registered with the SEC or ask for help as their financial capability begins to slip—opening them to potential exploitation. And investing in an unregistered advisor or product makes it harder to track down fraudsters and recover losses.

AS DEPRESSING AS IT IS, those in the thick of it see a remedy. "I believe most of this will be resolved in a number of years, through awareness, use of technology, and enlisting family members or friends. It won't completely eradicate it, but it won't be the crime of the century," says Liz Loewy, who oversaw the prosecution of hundreds of elder-abuse cases in the Manhattan District Attorney's office, including Astor's, and now serves as general counsel for EverSafe, a firm using technology to prevent abuse.

Some of the most common tools used to help people as they age—like joint accounts or a power of attorney—are also the most frequent weapons for abuse. "People rarely use guns to rob banks. They use a power of attorney. It's growing at a stunning pace," says Peck Ritchey's Peck. A power of attorney document authorizes someone to act on another's behalf. It can be limited to certain circumstances, or broad and unchecked, as in a durable power of attorney. That's why Peck recommends naming another, second person in addition to the power of attorney who must consent before withdrawals are made.

In states like Illinois that don't allow co-power of attorneys, he suggests a line to assign a "POA protector," who needs to consent to major changes. For those with at least $1 million, advisors recommend creating a trust and hiring a third party to act as trustee or co-trustee, especially after someone has lost a spouse.

Technology also can play a role. Banks are beginning to use artificial intelligence to spot unusual activity or signs of diminishing capacity. Families can create their own additional set of eyes, using technology from the likes of EverSafe and other software that enables trusted family members or friends to have view-only access to financial accounts, or receive alerts to unusual activity without divulging balances.

Financial firms often have front-row seats to exploitation. As a result, some, like Bank of America Merrill Lynch and Wells Fargo, are setting up teams to handle financial abuse and training advisors, as well as staff at branches, to spot cognitive decline and potential exploitation. The privacy and other laws that have tied advisors' hands are shifting. The House recently passed the Senior Safe Act of 2016, which will give financial firms cover from liability if they report abuse, and the industry has pushed for the right to temporarily suspend transactions as abuse is investigated. Firms are also asking that clients sign emergency contact forms, like those at doctors' offices, to let them alert trusted advisors.

Federal agencies, including the Justice Department and securities regulators, are increasingly working together to make up for what has been a fragmented approach resulting in scant nationwide data. Yet as financial abuse is more widely recognized, along with the need to tackle it on many fronts, financial advisors are reaching out more frequently to law enforcement, doctors, and Adult Protective Services. "One of the biggest challenges is to overcome the hopeless inertia that nothing can be done," says Kathy Greenlee, who has fought for decades to bring elder abuse to the forefront and just retired as assistant secretary of Aging for HHS. "If we can pull together multidisciplinary teams, there will be a solution. It takes a village to care for older people—and a village to unravel the complexities."