Fleecing the Seniors
Location: Arlene123's CAPS Blog
I've written this letter (below) to send to Congress about a scam that has devastated my family -- and may very well be devastating yours. Before I send it, I'd appreciate any feedback you have about the letter, as well as who (in additional to my senators and reps) should receive it.
(This is a follow-on to my previous post, "Theft Factory", so may be familiar.)
Also, if you'd like to share/forward/copy/utilize any parts of this letter, feel free! I'd like to share this information as far and wide as I can. Until Congress acts, the best we can do is to make this information known, so we can protect ourselves and our family members.
Dear Senator XXX,
I’d like to alert you to a situation that is affecting millions of seniors across the country. It is a scam so pervasive that it touches practically everyone in the country – either directly or through a parent, grandparent, other family member, or friend. You likely won’t realize what’s happening until it’s too late – if you ever realize it at all. This scam affected my parents and decimated their life savings.
Here is how it works:
1. You are a conservative saver, and you have a large amount of money in the bank. Since you are a “valued customer”, the bank gives you your own personal financial representative, with whom you build a relationship over time. But this person is not on your side. He will prod, coax, and sweet-talk you into moving your savings over to the bank’s investment arm. Since you like and trust this person, he may very well convince you.
2. If you do move your money over to the bank’s investment arm, your financial advisor will charge you high management fees (typically upwards of 1% of assets per year). Moreover, you will pay big commissions on top of that. However, these won’t be disclosed as commissions – they will be incentives disguised in different ways, which are paid to your advisor by those who wish to sell you products. Since you don’t know about these, and since you trust the paid professional you’ve hired – someone who represents to be giving you impartial advice – you will be an easy victim.
3. Because of these incentives, your advisor will dump investments into your portfolio that may include: funds of funds (which charge layers upon layers of fees), IPO fund offerings that the bank can’t manage to sell off, structured products consisting of packaged-up collections of sketchy assets, variable annuities, and the like. Anything the bank wants to get rid of, wishes to hawk, or gets a kickback to sell will be dumped into your account. All the while, your advisor will be assuring you that these are excellent investments.
4. The result will be that you will almost certainly do worse than the market overall – at the very least, by the fees and commissions you pay (commissions that have been taken – stolen! – without your consent), and at worst, by scorching losses obtained via inappropriate investments.
5. If – big if – you figure out what has happened (and most people don’t, they will think that the market just did badly), you will have little recourse. The system is rigged against you. The bank will have forced you to sign a mandatory binding arbitration agreement that shuts you out of the court system. Even if the bank has committed fraud, forgery, etc. – it doesn’t matter. The courts are closed to you.
6. If you manage to obtain a settlement or get a judgment from the arbitration forum, the results will almost certainly be kept confidential. Therefore, the goings-on are kept quiet, and the banks can continue their practices unabated.
All of the above happened to my family at one of the largest banks in the country. Because of a settlement and confidentiality agreement, I cannot talk about the bank or the specific events. However, I can talk in general – and this IS very general. These practices are rampant. ALL of the big banks do it. It is their strategy, their bread and butter that they talk about proudly to their shareholders: referrals of high net worth customers (i.e., our parents and grandparents) to their investment banking arm, so they can sell them all variety of (largely inappropriate) investment products under the guise of professional advice. Ever since the repeal of Glass-Steagall, you cannot put your money in the bank and be left alone; you will be harassed at every turn.
My parents did not do anything unreasonable: They did business with a large, national, reputable bank. They hired a certified financial planner, a fiduciary who was supposed to be providing objective advice. They paid high management fees, so there was no expectation of anything “free”. They asked all the right questions (Were there any commissions? “No.” Were there any loads? “No.” Are these investments appropriate for us? “Yes.”) But they were swindled nonetheless.
And they are in good company – this is happening to millions of people, every day, all over the country. These are professional conmen, who are swindling investors (particularly seniors) to devastating extents.
These conflicts of interest and kickbacks that are ubiquitous in the financial industry should be illegal. They are illegal in most fields. For example, a physician who receives a kickback for the referral of a Medicare of Medicaid patient would be committing a felony under the Federal Anti-Kickback law. A felony. But in the banking industry, kickbacks are accepted practice – encouraged, rewarded – with no end in sight.
It is unconscionable not to fix this.
I believe we should enact the following rules to protect consumers, particularly senior citizens:
1. Ban banks from soliciting banking customers to move their money over to the investment bank.
You should be able to put your money in the bank and keep it safe, without being harassed at every interaction to open an investment account or buy complicated financial products. This affects seniors the most, as they are more likely to have large amounts of money in the bank, to visit branches, and to interact with representatives.
2. Ban fiduciaries from having conflicts of interest.
If you are paying a professional to provide you with advice, if that person is a fiduciary who professes to be providing independent and unbiased recommendations, it is reasonable to expect that they are working in your best interest and not taking kickbacks from those trying to take advantage of you. It is one thing for a salesperson to take commissions; in that situation you know to be on guard. With a paid financial advisor, you believe that this person is on your side, which makes you easy prey. These conflicts of interest should be banned, just as we have done for doctors, lawyers, realtors, and other professionals.
Other countries have already done this! The UK, India, Norway, Finland, Denmark, and the Netherlands have all banned commissions paid to financial advisors, believing that such commissions are tantamount to fraud. Our seniors deserve the same protection.
I should note that some people advocate disclosure as a solution, but disclosure is not the answer. According to Dan Ariely, professor of behavioral economics at Duke: “Disclosure doesn’t seem to help. Several studies have shown that when professionals disclose their conflicts of interest, this only makes the problem worse. This is because two things happen after disclosure: first, those hearing the disclosure don’t entirely know what to make of it and second, the discloser feels morally liberated and free to act even more in his self-interest.” Disclosure has not – and will not – solve this problem. We need to make these practices illegal.
3. Ban mandatory binding arbitration agreements in consumer contracts.
These arbitration agreements, drafted by and for corporations, are being imposed on consumers, and consumers have no choice but to sign away their rights or else forgo banking services, healthcare, phone service, etc. Consumers are not agreeing to these willingly.
Moreover, corporations, jubilant by the success they’ve been having in shielding themselves from liability, are going further and further. Many have taken the step of banning class action suits, and the Supreme Court recently ruled that this is enforceable. Here are telling words from the dissent: “If the arbitration clause is enforceable, Amex has insulated itself from antitrust liability — even if it has in fact violated the law. The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.” At what point do we say enough is enough?
Finally, arbitration enables firms to keep their nefarious practices secret, rather than making claims public record and allowing for full discovery as would be done in court. Here is an excerpt from a recent New York Times article: “As a result of a 1987 Supreme Court decision, brokerage firms have been able to insist that customers give up their right to sue in court before they can even open an account. The resulting transfer of investor lawsuits to private arbitration has meant that Wall Street firms and their employees have avoided the burden of a court record of claims against them for a quarter-century.” True enough. Consumers, such as my parents, are kept in the dark, oblivious to the treachery that awaits them when they trust and rely on their financial advisor.
In short, it is preposterous that corporations should be able to shield themselves from liability through contracts couched in legalese that consumers have no choice but to sign. The European Union classifies pre-dispute consumer arbitration clauses as unfair terms. In France, such agreements are considered unfair and unenforceable. In Japan, consumer arbitration agreements can be revoked by the consumer at any time up to the arbitration hearing. Why don’t US citizens deserve the same protections?
Banks are swindling our parents and grandparents. This is here and now. It happened to my parents yesterday; it may happen to your parents tomorrow. Seniors’ life savings are at stake. Someday, we will look back and be shocked that we allowed this to happen for so long. Let us stand up for what is right.