Financial professionals have slowed the growth of elder fraud cases, new research finds

Financial professionals have helped slow the growth of elder financial fraud thanks to provisions introduced by the 2016 Model Act, according to recently published research in the Journal of Financial Economics.

Elder financial fraud has increased exponentially in recent years. In 2022, 88,262 victims over age 60 reported being defrauded, according to the FBI's Internet Crime Complaint Center. Among the victims, reported losses totaled $3.1 billion, an 84% increase from the year prior.

The number of suspicious activity reports (SARs) — used to report suspected financial crimes to the federal government — involving elder financial exploitation (EFE) more than doubled from 2015 to 2016.

In an attempt to curb the rising rate, the North American Securities Administrators Association (NASAA) adopted the Model Act to Protect Vulnerable Adults From Financial Exploitation in 2016, which "deputize[d] financial professionals" to screen for financial fraud through two new authorities.

"First, the new laws granted professionals the power to reach out to a trusted contact to discuss red flags and confirm mental and physical health status. Prior to the Model Act, strict privacy laws impeded this," according to the journal article by Bruce Carlin, Tarik Umar and Hanyi Yi. "Second, professionals were given the authority to halt disbursements that appear suspicious for financial abuse. However, the designers of the Model Act made it permissive and did not create an obligation for financial professionals to act, either through rewards or punitive actions."

Since its adoption, 36 states have enacted legislation or regulations based on the Model Act. Researchers found that in one year there was a 15.4% drop in fraud cases for jurisdictions that adopted the provisions compared to those that did not.

"Our results are 'relative,'" said Umar, an assistant professor of finance at Rice University. "That is, states adopting the Model Act are seeing relatively lower growth than states that have not adopted the Model Act."

The original act adopted by the NASAA included "broker-dealer agents, investment adviser representatives, those who serve in a supervisory, compliance, or legal capacity for broker-dealers and investment advisers and any independent contractors that may be fulfilling any of those roles." However, some individual state bills limited the new authorities to only a subsection of financial professionals.

Rhode Island, for instance, only extends the new authorities to broker-dealers, according to the research. But, the majority of states have included financial advisors in their versions of the act.

"The effect is stronger in counties with more deputies, and where more deputies work for bank holding companies. This is consistent with the fact that financial exploitation typically involves a checking or savings account (wire transfer, check, or debit card)," according to the research.

The nature of financial fraud can differ depending on who the offender is.

"The nature of stranger-perpetrated fraud bears little resemblance to fraud initiated by people the victim knows," wrote Jilenne Gunther, the national director of AARP's BankSafe Initiative, in an AARP study on elder fraud.  "While strangers may rely on quick and irreversible transactions such as gift cards or wire transfers, perpetrators familiar to the victim are more likely to make incremental inroads, gaining direct access to funds, for example, by attaining joint ownership or power of attorney status on their victims' accounts."

Offenders who are known by the victim were found to cause 72% of all elder fraud annually, according to the AARP study. Researchers found that the effect of the NASAA provisions was particularly significant for socially isolated individuals.

"The effect is stronger in areas with more isolated elderly who have fewer existing social connections to protect them against fraud," said Umar. "In these more isolated settings, the relation with an advisor can be especially helpful at protecting against abuse. This is a positive light on financial professionals when there has been relatively more focus on a few bad financial professionals who financially exploit the elderly."

The NASAA's Model Act is not the only legislative effort to address elder fraud. The Senior Safe Act, which passed in 2018, gives legal immunity to financial professionals if they report that a client aged 65 or older is being defrauded.

While the Senior Safe Act is a federal law, covering all 50 U.S. states, the NASAA's Model Act has to be implemented on a state-by-state basis. Still, experts say that when adopting it as envisioned by NASAA, the Model Act goes a step beyond the Senior Safe Act, allowing financial professionals to put holds on disbursements suspected to be fraudulent, potentially stopping fraud before it happens.