“Honey, your broker called to tell you that your stock split finally, but they can’t find all the pieces.”

David Disraeli has been helping clients and their loved ones for over 30 years.  If you are helping an older loved one with their affairs, or are about to do so, you certainly want to see their money go as far as possible. Unfortunately, senior citizens are especially susceptible to receiving bad advice and being sold the wrong products and investments. Clients frequently ask me to review financial information for their parents. I normally take a deep breath, expecting not to like what I see because the impropriety ranges from simple incompetence to outright larceny. Many unscrupulous salespeople prey on senior citizens, and other financial salespeople simply do not understand the complexities of dealing with older investors. Although entire books could be written about this topic, my purpose here is to educate you on the signs of inappropriate investments, abuse, or fraud.

The most common problem I see is what financial planners call “suitability issues”. Financial products could be compared to food or drugs. I know one person who will die from eating a single peanut, while most people could eat all the peanuts they want and be just fine. The fact is that peanuts are not suitable for everyone. Moreover, in the case of my allergic friend, it’s not the peanut’s fault. Similarly, it’s not that a particular investment is bad, it is a question of whether it is suitable for a person based on their age, resources, tax situation goals, liquidity needs, etc.

Suppose your 72-year-old mother put her entire $300,000 nest egg in CD’s. Is this a good thing? Maybe, but probably not. If she’s on her way into a nursing home, she might need access to her money, or complete liquidity. On the other hand, if she’s healthy she might live another 10 or 15 years. In this case, CD’s will not provide much in the way of income, especially after taxes and inflation.

What if you have 80-year-old parents who have had the same broker for 30 years and he’s kept them in a mixture of 70 percent stocks, 30 percent bonds. Is this a problem? I think so, but it depends on a number of factors.

The older a person gets, the more difficult it becomes to balance risk and liquidity with the need to produce income. Stocks are good long-term investments, but if your parents need long-term care or to modify their house, they might have to sell stocks in a down market.

On the other hand, unnecessary liquidity — meaning too much money in CD’s, money market, and checking accounts — can be very expensive in lost investment returns. I routinely warn people that it doesn’t matter if the stock market has gone up in each of the last 100 years — which it hasn’t — it may not go up next year. In fact, it may drop.

As a rule of thumb, I suggest that if a person older than 65 has more than 60 percent of their money in stocks, or more than 50 percent in cash, they should get professional advice from someone other than their current advisors.

Annuities are very popular among senior citizens. But like certain drugs, some annuities can be toxic for seniors. Some annuities have high surrender charges and force beneficiaries to take a payout rather than a lump sum. Other annuities are designed for seniors and have generous waivers for nursing home stays and pay 100 percent at death.

More recently insurance companies have begun offering annuities with returns linked to the stock market. They are sold as a safe replacement for stocks, but that is untrue. Here are a few guidelines to help you determine if something is amiss in your relative’s portfolio and avoid scams.

 

• Never buy an investment product over the phone unless you are dealing with someone with whom you have a long-standing relationship.
• You should not see a lot of trading, typically no more than a few trades per quarter.
• Carefully scrutinize any product with a back-end fee or surrender charge, especially mutual fund “B” shares.
• Avoid tax-free bonds unless the investor is in the 28 percent or higher tax bracket.
• Stock portfolios should have some international holdings and diversification among large and small companies.
• When in doubt, ask questions.