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10 things seniors should consider when investing

Financial professionals are concerned about growing fraud and abuse

Anyone investing money needs to do homework, talk to trusted, knowledgeable people and not act in haste. But it's especially good advice for seniors, who tend to have assets and are favorite targets of the unscrupulous.

The Certified Financial Planner (CFP) Board of Standards is concerned about the increasing level of financial fraud and abuse directed at seniors. The board's consumer advocate, Eleanor Blayney, says there are ten red flags that seniors and their families should pay attention to before choosing a financial advisor parting with their money.

1. Look beyond the letters after a financial adviser's name

The board is concerned that some seniors are dazzled by the designations that many planners place after their names. Blayney says some are pretty flimsy.

“We are concerned and have actually been in discussions with the Consumer Financial Protection Bureau (CFPB) about these designations that are very confusing to consumers,” Blayney said. “Among these worrisome designations is anything that suggests the person has special expertise for seniors.”

2. If you don't understand what's being sold, don't buy it

Let's face it, no one wants to appear uninformed so you tend to nod and don't ask questions. But when it comes to complex financial instruments, why should you be expected to know everything?

You probably don't spend each day glued to CNBC. So when an advisor is talking about something you don't understand, don't buy it until they explain it in a way you can understand.

“It's a little bit of a Warren Buffet rule,” Blayney said. “If he doesn't understand it, he doesn't buy it. And he's a pretty smart man.”

3. There's no such thing as a free lunch

This one has a double meaning, both applicable to seniors. If a financial advisor invites you to attend an “educational” seminar with a free lunch served, fully expect it to end with a hard-sell pitch to buy something. You should view what they're selling with more than a little skepticism. Because there really is no free lunch.

4. Just because a so-called expert recommends it, doesn't mean it is right for you

Here's a case where a little bit of information can get you in trouble. Maybe you are watching business news and see an expert who is bullish on one sector or another.

“Sometimes we hear advice from an expert and we don't realize it doesn't apply to us,” Blayney said.

Everyone's investment profile is different. Some investments are right, some are wrong and it's dangerous to try to make the distinction solely by watching television.

5. If it sounds too good to be true, it's probably not legitimate or safe

You hear this all the time about scams, and the fact that it applies in the financial investment world isn't surprising, since some investments are, in fact, scams.

“Seniors are often attracted to investments by higher interest rates,” Blayney said. “But when you hear of an investment with a high interest rate or return, there is more risk. You just can't escape it.”

And some of these high-interest investment “opportunities” are pretty shaky. If you have a higher risk appetite and want a higher return, you should consult with a trusted advisor. And that brings us to our next red flag.

6. Don't confuse familiarity with trust

Maybe it's someone in your church who happens to be a financial advisor. If they go to your church, they have to be legit, right? Maybe they are a friend's family member. That doesn't make them an expert either. This, in large part, is how the whole Bernie Madoff scandal happened.

“There were other things that Madoff did that should have raised red flags but because you know him, you see him around and you know others who are investing with him, you tend to trust him,” Blayney said. “It's a mistake.”

7. The final sign-off should always be yours

What you sign when you invest your money matters. That's why you should always read it carefully. And when you do, there should be nothing left blank.

“At its most benign it is meant to be helpful but it opens up the possibility of forgery and fraud,” Blayney said.

8. Make sure the money others are making isn't yours

People ripped off by pyramid and Ponzi schemes are sometime shocked because for two or three months, they were getting big checks. Then suddenly the well went dry.

That's because the person running the scheme was collecting money from other people and using it to pay you. Finally, he had to use your money to pay the new people he signed up.

So when someone is explaining an investment to you, make sure you understand how the investment makes money and how it can afford to pay you the return you anticipate.

Remember that even the savviest investors seldom achieve returns in the double digits. 

9. Get the full story: who gains the most – you or the financial professional?

Financial professionals don't work for free, nor should you expect them to. But when you are working with someone, whether they are an advisor or a broker, understand how they get paid.

“It's not to say someone shouldn't earn a commission,” Blayney said. “But you just want to know how much and under what circumstances.”

10. You have rights as a homeowner. Know them

You see a lot of advertisements on cable TV directed toward seniors and promoting reverse mortgages. Be careful.

“There are very strict rules in regard to reverse mortgages and who is qualified to issue them,” Blayney said.

A reverse mortgage is an instrument authorized by the U.S. government to allow seniors to tap some of the equity in their homes while they are still living there. It sounds great but there can be a lot of things you don't understand.

The CFP board quizzed 2,600 financial professionals and found that more than half had personally worked with an older client who had been subject to unfair, deceptive or abusive financial practices in the delivery of financial advice or the sale of financial products. But the respondents estimated that only five percent of senior citizens actually report such financial abuse.

What you should do

If you are a senior citizen in need of investment advice, or the family member of one, ask for referrals from people you know and then check them out. Certification is one way to analyze a planner's credentials, as long as you're clear about what the certification actually means.

The CFP Board has a search function that allows you to find planners in your local area who it allows to use the CFP certification marks.

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