Connecticut Senior Citizens Warned About Pitfalls in Investing
March 14, 1995
State Banking Commissioner John P. Burke today cautioned the estimated 350,000 senior citizens in Connecticut who rely on investments for 25 percent or more of their income to be on their guard against common pitfalls in investing that can jeopardize their financial security.
The Banking Department's Securities and Business Investments Division and other state securities regulators from across the country joined with the AARP and the Consumer Federation of America to provide practical advice for seniors to avoid potential investment problems.
"Our purpose today is to help senior citizens knowledgeably approach and manage investments," Commissioner Burke said. "At one time, retired residents could comfortably live on income from savings accounts. But as interest rates declined, thousands of older Americans sought higher returns from investment products to make ends meet. We want to make sure that older investors, many of whom may not be financially experienced, understand the risks inherent in investing."
Today, more than 28 million Americans over the age of 65 rely to some extent on investment income to meet their expenses. Three-quarters of all seniors, including an estimated 350,000 Connecticut residents, derive 25 percent of their income from investments. Though older Americans once relied almost exclusively on federally insured products (such as bank savings accounts and certificates of deposit), a number of factors, including lower interest rates, have led the elderly and other citizens into riskier investments. Last year, the $2.2 trillion Americans invested in mutual funds topped the amount of money held in insured bank accounts covered by the Federal Deposit Insurance Corporation (FDIC).
Commissioner Burke stated, "Senior citizens, who may have a pressing need to supplement lost income from lower interest rates, can be susceptible to promises of higher returns without understanding the risks involved and the amount of various sales charges. The Banking Department cautions elderly investors to be especially mindful of common investment problems."
Typical elderly investment pitfalls, as outlined by state securities regulators, the AARP and the Consumer Federation, include:
- Salespeople posing as impartial advisors. Research shows that older consumers tend to be more trusting, which is why confusion can result from the common use of confidence inspiring titles such as "investment consultant" and "financial advisor." Many senior citizens are unaware that investment salespeople make their living on a commission basis. Seniors should also recognize that individuals they speak with may receive referral fees for directing them to financial professionals.
- Uninsured products sold by broker-dealers in financial institutions. Older investors are most likely to place particular trust in banks. It is very important for seniors to remember that investments, whether purchased on bank premises or at brokerage firms, involve risk and are not insured against loss by the FDIC.
- Confusion over government insurance. Investments such as mutual funds are not insured by the FDIC against loss. If interest rates rise or market values decline, investors may lose money.
- Inadequate disclosure about investment products. Older investors in Connecticut must be on their guard about unwarranted claims that some financial professionals make in their sales pitches. Inadequate or misleading communication about products is compounded by prospectuses (and other investment disclosure documents) that are very difficult for people to understand. Many elderly investors claim they are not informed of, or fail to understand, sales charges, up-front fees and/or rear end charges. The Banking Department actively supports various efforts to crack down on abusive sales practices and to simplify prospectuses.
- Misleading fund names. Often the name given to a mutual fund may not adequately reflect its actual investment objective. Unsophisticated investors may be misled by terms such as "income" or "government" funds into believing that investments made in such products will not entail risk. In fact, the asset value of any mutual fund may fluctuate due to changes in market conditions.
- Account statements that do not clearly indicate investment performance, fees and commissions. Most brokerage and mutual fund account statements reveal very little about investment performance and fees and commissions. Older investors should ask their financial professional to calculate these figures and provide them in writing if they are not available.
"Since many senior citizens are retired, they cannot easily replace monies lost in investments from future wages," Commissioner Burke said. "It's vitally important that older Americans consider investments that are suitable to their needs, especially when their hard-earned savings or lump sum pension payments are at stake. "
The following advice was offered by the Banking Department's Securities and Business Investments Division to help older investors make proper and informed investment decisions:
- Define your financial objectives. The first step in wise investing is to understand your current and future financial goals. This will dictate how you should invest. Most older investors will be interested in investments that generate income and preserve capital. Any investment involves risk. Before investing, decide how much risk you are comfortable with and can tolerate. Investors may wish to provide financial professionals with written descriptions of their needs and risk preferences. Investors, in turn, may also wish to have financial professionals confirm in writing their understanding of those financial goals.
- Check out your financial professional. The first step in dealing with your investment professional is to check him or her out with the Securities Division. You can reach the Division by dialing (860) 240-8230 or toll-free 1-800-831-7225. The agency maintains records on all of the stockbrokers, brokerage firms and investment advisers licensed to do business in Connecticut. You should avoid doing business with financial professionals who have a track record of state, federal, and self-regulatory disciplinary actions, negative arbitration decisions, and civil litigation judgments.
- Be wary of strangers attempting to sell you investments. When a stranger calls promoting an investment, immediately ask yourself - why am I being called? Ask the person how he or she obtained your name and telephone number. Ask if the person would be willing to explain the investment proposal to your attorney, accountant or to a family member. If you receive a challenging reply such as "can't you make your own decisions," hang up the telephone.
- Don't be pressured into acting on an investment decision. Give yourself adequate time to thoroughly check out an investment and the person selling it. Seek a second opinion. Don't be afraid to ask questions. Your money is too important to be placed at risk with a hasty decision.
- Recognize the important difference between bank deposits and investments. Mutual funds and other investments are more commonly available today from broker-dealers located at bank offices. Older investors who have been bank customers for many years must realize that mutual funds or other investments, no matter where they are sold, are not covered by the Federal Deposit Insurance Corporation (FDIC).
- Invest only in what you fully understand. Never assume that an investment is federally insured, low risk, or guaranteed to deliver a certain return. Before buying, always investigate a potential investment by getting and reading the prospectus (or similar offering document). Compare what various experts say by reading through the wealth of valuable information available at public libraries and bookstores.
- Investigate any potential investment. Almost all investment opportunities must be registered in the state where they are sold. Check out a potential investment by calling the Banking Department's Securities and Business Investments Division. Although the Division cannot make an investment decision for you, it can tell you whether or not a particular investment is registered in Connecticut.
- Calculate what an investment will cost. Always remember that most financial professionals are actually salespeople who rely on commissions for their income. If the company they work for sponsors an investment, they may find themselves more motivated to recommend it to you. Before you invest in a product make sure that you understand how much of a commission a financial professional will earn and how much you will pay in fees ... both now and later.
- Monitor your account statements closely. Your account statement should reflect only the pattern of investing that you have authorized. If you note a discrepancy, raise the problem immediately with your broker and, if necessary, the branch manager who oversees the broker. Carefully review your account statement or other documents which reflect fees and commissions. If such documents do not clearly indicate this information, contact your financial professional and ask for these figures. If you think something is wrong with your account and your concerns are not promptly being addressed, call the Securities Division and then follow-up by filing a written complaint outlining the problem and the parties involved. The Division's address is 260 Constitution Plaza, Hartford, CT 06103-1800.
"Older Connecticut investors should know that the Department of Banking's Securities and Business Investments Division will always be available to help them," Commissioner Burke added. "We encourage residents to call or write the Division whenever they have questions or are experiencing investment problems."