Our 2 Cents
With countless news stories in the past weeks revolving around the Equifax data breach, many Americans have renewed concerns about the risks of identity theft and fraud. While all demographics are susceptible to harm via these channels, retirees in particular are an increasingly frequent target of scams, fraud, exploitation, and other forms of “elder financial abuse,” as it is now termed. Retirees are a lucrative target, having more wealth on average than younger Americans, and they sometimes have vulnerabilities due to physical or emotional circumstances on which exploiters can prey. Reports vary regarding the impact of these schemes, but estimates of annual financial losses are consistently measured in the billions. Perhaps even more concerning, victims of elder financial abuse have often exhibited feelings of anxiety, anger, guilt, and depression and have become more isolated after the incident. Below we provide a brief overview of the types of abuse being perpetrated and some tips for our clients and friends on how to protect themselves or their loved ones.
Types of Elder Financial Abuse:
- Scams. There are a wide variety of scams targeting retirees, most of which prey on the victim’s hopes, fears, concerns, or sympathy to elicit money and/or personal information, which can then be sold on the black market. Many common scams promise good fortune—that you’re receiving an inheritance, you’ve won a prize or the lottery, you can sell an unused time share for an attractive price, you can get a particularly good deal on medical equipment—if you provide a deposit (“to cover transaction fees”) and hand over your personal information. Similarly, scams may use fears—that your grandchildren are in trouble, your computer has a virus, your roof or other parts of your home urgently need to be repaired—to elicit money or information. Sometimes even using publicly available information (such as obituaries), scammers can target those in a particularly vulnerable state of mind. For example, an article on CNN Money describes the story of an 83-year old who had recently lost his wife and fell victim to a computer virus scam in part because he didn’t want to lose access to emails and photos that held memories of his wife.
- Exploitation. Unfortunately, sometimes elder financial abuse originates closer to home—among caregivers, family members, friends, or hired professionals, who exploit an older person for their own financial or personal gain. This can take many forms, including promising care or services for money and not following through, getting an older person to lend or give money through deception or coercion, and using money or property without the person’s consent. According to a recent study, the cost of this type of abuse far outweighs that of scams. We at PFS have seen this even among new clients, who come to PFS from other financial advisors or investment brokers. In one case, a broker had sold an 80-year old client a bond that not only was issued by an unstable municipality but was a 30-year zero coupon bond, meaning that he would not receive any interest payments on the bond until he was 110 years old.
How to Protect Yourself or Your Loved Ones:
- Regardless of age, it is beneficial to consult with one or more family members or close friends before divulging personal information or dispensing money, particularly when a request comes over the phone or email. Often scammers will try to attach a sense of urgency to their promises or threats, but this should make you even more skeptical of their claims.
- Unless you initiated the call, you should never have occasion to give out sensitive personal information over the phone, such as bank account, Social Security, or Medicare numbers.
- The AARP has established a Fraud Watch Network that is available to join free of charge (regardless of age or AARP membership status). They will email with alerts of any new types of scams, as well as with prevention tips and access to related resources.
- If you feel particularly vulnerable to these risks, there are private companies that you can pay to monitor your accounts and credit reports. If a loved one has financial power of attorney for you, they might also be able to do this on your behalf. If so, they should set up reminders to check your accounts on a regular basis.
- If you need professional services—whether financial, legal, medical, or otherwise—try to obtain referrals from family or friends of persons or organizations who they trust and with whom they have long-standing relationships. Guarding who you let into your “inner circle” may lessen the likelihood of exploitation down the road.
If you are concerned about the risks of elder financial abuse or face any unexpected demands for money or personal information, please give us a call to discuss the best course of action. In general, if any promises seem too good to be true, they probably are, but we would be happy to serve as a trusted point of contact for any clients or friends.
It is likely that sometime in the last week or two, you got on your computer or pulled out your phone and checked the balance in your bank account, investment account, or 401(k). Perhaps, like us, you’ve enjoyed watching the balances in your investment accounts increase over the past year given the above-average market performance. However, unless or until you actually withdraw money from your accounts to use in daily life, what you consider your “assets” or “net worth” basically amounts to just numbers on a screen. Banks do not keep all of their customers’ account balances in cash in their vaults, and for most Americans, the amount of physical cash that we keep on hand is extremely low relative to our total assets. Should we be worried that most of our assets merely amount to numbers on a screen and that the small portion we hold in cash will likely continue to decrease as money becomes more and more digitized? In our view—no. While recent years have witnessed many advances in the digitization of money, the fact that our monetary system is based primarily on good faith is not new, nor is it specific to the U.S. Furthermore, there are many protections built into the system to ensure that it continues working and benefiting our economy for years to come.
Digitization of Money. While cash is still relevant and not going away any time soon, it is becoming easier and easier to live a cashless lifestyle. We often pay for goods and services with credit or debit cards—more recently, even with the tap of a phone—we pay bills electronically, transfer funds electronically, and use cash and checks less and less frequently. In a recent example of this trend, Visa offered some small companies up to $10,000 to update their payment technology and in return, stop accepting cash. While it is still the most popular form of payment, cash use is trending downwards and compelling discussion on the future of currency.
The newest players in the digital money game are cryptocurrencies, i.e. digital cash systems designed to manage exchanges in a highly secure manner without a central bank as intermediary. The most prevalent cryptocurrency is Bitcoin, an open-source, peer-to-peer software where transactions take place with no intermediary. All Bitcoin transactions are public and are stored on a public ledger called a blockchain. Bitcoins are held in personal online “wallets” that store the unique credentials of the Bitcoins and their transactions, which can be completely anonymous. While some individuals praise Bitcoin as the future of currency, there are plenty of red flags regarding cryptocurrency. Just this month, a difference of opinions on the future of Bitcoin caused a split into two separate currencies that handle transactions differently. In our view, the value of Bitcoin going forward is very uncertain, and, like commodities, it appears to be a very speculative and volatile investment, which we would not recommend to our clients.
Good Faith Monetary System. As mentioned, many of our “assets”—e.g. bank and investment account balances—are not backed by cash. For banks, the Federal Reserve sets reserve requirements that dictate what percentage of their liabilities must be held in cash. Big banks are required to hold only 10% of liabilities in cash, while for smaller banks, that number is even less. The same is often true in investment and retirement accounts, in which mutual fund companies lend out a portion of the securities that their investors are holding, keeping in hand only a fraction of the assets on their books.
However, the fact that our monetary system is primarily based on good faith is not specific to the U.S. or the 21st century. While advances in the digitization of money and electronic banking and investments may have further disconnected the numbers on our screens from physical cash, the idea that banks, for example, only hold a portion of their liabilities in reserve (known as fractional reserve banking) has been around since the Middle Ages. Even in small and remote economies, the concept of a monetary system based on good faith has arisen. For example, in Micronesia, there is a group of remote islands called Yap. For currency, the Yapese use a type of limestone not available on their home islands, which they retrieve from another island 250 miles away. They shape this limestone into large circular forms with a hole in the middle and transport them back to Yap, where they are used as money. However, the stones are often very difficult to move, so a block sitting outside someone’s home may change owners multiple times, used as payment for goods or services, without ever leaving its location. When used as currency, all the Yapese agree that the money has been transferred, even though the stone remains in the same place. As journalist John Lancaster explains, “the real money isn’t the [stones], but the idea of who owns the [stones].” Our system is similar—the real money is the number on the screen (rather than just the cash in your pocket) because we collectively agree that the numbers on the screen have meaning.
Additional Concerns and Protections. Of course, this type of system does generate some concerns, especially in the digital age. While earlier generations may have worried more about a run on banks, many savers and investors now worry about individual accounts getting hacked, or perhaps about electronic warfare targeting Americans collectively at an institutional level. For savers and investors in general, and PFS clients in particular, however, there are many protections built in the system. Bank accounts are insured by the FDIC (Federal Deposit Insurance Corporation) for up to $250k per depositor, and the SIPC (Securities Investors Protection Corporation) provides similar insurance for up to $500k on investment accounts. With respect to PFS clients, TD Ameritrade has purchased an additional $149.5 million of coverage for a total coverage of $150 million per investor, and TD Ameritrade’s Asset Protection Guarantee covers client accounts impacted by unauthorized activity. Furthermore, PFS monitors all client account activity, so we can help identify any irregularity.
While the digitization of money and increasing use of electronic banking and investments may come with its own set of challenges, we are confident that our type of monetary system, built in part on the good faith of its participants, will continue to serve the economy well, as it has for centuries past.