Protecting your parents: Keep the sharks at bay

After his terminally ill father was sold an annuity that tied up his money for years, Jim Tener lobbied for stricter laws on insurance sales in California.

(Money Magazine) -- In 45 years as a service scheduler for a Northern California auto dealer, Art Tener learned how to stay organized. Even after retirement, Tener scrupulously kept up his calendar, noting appointments, daily chores, accomplishments.

That's how his son, Jim, learned that his dad had a new friend escorting him to meals and the museum.

"Who is this guy?" Jim asked. That question led Jim to the discovery that the "friend," a local insurance agent, had persuaded Art to roll $113,000 in savings he had in annuities into new deferred annuities that handcuffed the money for up to 16 years -- despite a terminal illness that doctors said meant Art had less than two years to live.

Art, then 79, had been worried about how he would pay for nursing-home care in case his wife, who suffered from Parkinson's disease, one day needed it. He believed the new annuities would help. But the transfers cost him nearly $11,000 in penalties; worse, since he couldn't get to his money without paying large surrender fees, he was no longer able to cover his living expenses without his children's help.

"He lost huge on this thing," says Jim, 52. "Instead of enjoying what turned out to be the last nine months of his life, he didn't have $100 to spare."

One out of every five older Americans has been sold an inappropriate investment, paid excessive fees for a financial product or service, or been a victim of fraud, according to a 2010 study by the Investor Protection Trust; new research from MetLife puts their collective losses at $2.9 billion last year.

Complaints about exploitation of the elderly are clogging the regulatory enforcement system: Some 44% of investor complaints nationwide came from seniors, and about one-third of enforcement actions involved elder investment fraud, the North American Securities Administrators Association (NASAA) reports; states with large older populations posted even bigger numbers.

Although that survey was done five years ago, interviews with more than three dozen regulators and consumer advocates suggest that the problem is just as prevalent today.

Says NASAA president David Massey: "Seniors remain our most vulnerable investors."

It's easy to understand why sellers of financial products, legitimate and otherwise, want to target your mom and dad: They're where the money is. After a lifetime of saving, with homes often paid off, the average household led by those 75 and over has a net worth of $638,000.

Other factors also make the elderly especially vulnerable to exploitation. For one, the ability to navigate complex financial decisions worsens with age, particularly for the one in three people over age 70 with a cognitive impairment.

Seniors also tend to be more open to sales pitches -- in part because they have time to take the calls.

When those sales tactics turn overly aggressive, unsuspecting seniors can be lured into paying too much or buying a financial product that makes no sense for them.

The techniques aren't necessarily illegal, but they can be just as damaging as outright fraud, resulting in losses that deprive your parents of money they need for everyday expenses.

How can you ensure your parents don't become victims? First you have to understand the sales techniques that your folks are up against, then you need to marshal a smart counterattack.

You'll find both in this story, the last installment in Money's three-part series about how to protect your aging parents (see "Help your aging parents" and "Keep your aging parents safe at home").

The fliers come in a steady stream, roughly one a month, inviting Leonard Bach, 70, and his wife, Mary, 66, to attend a free seminar while eating a nice meal at a local restaurant, hotel, or community center. Investing, estate planning, tax-cutting strategies -- any and all might be on the agenda.

That's standard fare for seniors: Nearly 60% of older Americans surveyed by AARP two years ago had received five or more invitations in the previous three years to these so-called free-lunch seminars; 13% attended.

The Bachs, of Murrysville, Pa., joined the ranks of seminar-goers six years ago after Leonard retired as a purchasing manager for Westinghouse.

"I was looking for answers to managing our personal finances," Len says.

He didn't find them. Instead, the Bachs were made uneasy by presenters who spoke only in "vague generalities" about the topic at hand but pushed hard for follow-up appointments to pitch sales of investments, loans, and insurance.

So in 2005 the couple signed up to be "senior sleuths," sharing their observations about free-lunch seminars as part of a monitoring program run first by securities regulators and, later, AARP.

Twenty presentations and several follow-up meetings later, the Bachs have reported on a spectrum of bad practices, from exaggerated claims about the benefits of a financial product to instances of fraud or abuse.

Once a salesman who prepared a plan for investing $100,000 turned out to be unlicensed. Another time seminar sponsors wouldn't serve the meal until the attendees agreed to an at-home consultation. "Talk about a pressure tactic," says Mary.

The Bachs' experiences are typical of the free-lunch circuit, says Pennsylvania securities commissioner Steve Irwin. Organizers often talk up complicated, costly products -- variable and equity-indexed annuities, reverse mortgages, private real estate investment trusts -- inflating the benefits while glossing over the risks.

"They tell part of the story but not the whole story to get the sale," Irwin says.

Sponsors don't usually hawk anything at the seminar itself; the real goal is to procure a follow-up meeting at the senior's home, where a salesman can make the hard pitch.

The line between aggressive technique and punishable practice stemming from these seminars can be blurry; regulators often don't crack down until the transgression is blatant.

The state of Illinois in June, for instance, revoked the investment adviser credentials of Susan and Thomas Cooper, citing 12 cases in which they replaced clients' existing annuities with new equity-indexed annuities, costing those older investors thousands in surrender fees while the couple pocketed $80,000 in commissions.

The Coopers, who ran Pinnacle Investment Advisers, attracted clients through lunch and dinner seminars at local hotels on topics like "Avoid nursing home spend down." The couple, through their attorney, declined to comment, but are appealing the decision.

How you can help:

Ask your parents to just say no: The persuasive tactics used at these seminars are hard for many seniors to resist. The offer of valuable info and a nice meal in a relaxed setting makes attendees feel obligated to give something in return. ("Sure, we can have a follow-up meeting!")

"It's not a level playing field," says Doug Shadel, director of AARP in Washington. "The sponsors make it look like a social situation, when their motivation is to sell you stuff."

Address concerns proactively: Are your folks worried about how they'll afford nursing-home care? Interested in generating steady income or crafting an estate plan? Offer to research those issues, put them in touch with the right experts, or arrange a consultation with a fee-only planner (findanadvisor.napfa.org).

Go with them: Can't talk your folks out of going? Tag along. If that's not possible, give them AARP's free-lunch checklist (aarp.org/nofreelunch), which can help them recognize shady practices.

When Delois Miller of Chico, Calif., first answered a call in 2008 from someone offering information about changes to Medicare, she smelled a sales pitch. Not interested, she said. After the fourth call, she relented.

"The lady had a sweet voice," says Miller, now 81.

The agent who showed up at her home, though, wasn't the one who'd called; it was a man who wanted to talk about other financial issues, Miller says: How did she afford care for her husband, who had Alzheimer's? Did she have enough income? Her money was in CDs? Why, those weren't earning anything!

Miller says the agent claimed he had just the product for her, and she'd even get a $1,000 bonus for signing up. As for Medicare? She says he handed her a pamphlet about the program and left it at that.

Miller did end up buying a deferred annuity from the agent. It pays a better rate than her old CDs, but she says she didn't understand the big catch: She can't access most of the $40,000 she invested for 10 years without paying stiff penalties. And she needs that money to help pay the $2,300 monthly cost of nursing-home care for her husband.

Miller talked to lawyers trying to put together a class-action suit against the insurer whose annuities the agent was selling, a $10 billion company named Bankers Life & Casualty that specializes in the senior market.

She ultimately decided against legal action, but the feeling of having been misled still stings.

"When they first called, I asked, 'Why are you doing this?' and they said, 'We do this to help seniors,' " Miller recalls. "Nothing about selling. What a bunch of BS."

Miller's agent, Terry Smith, referred calls to Bankers, which reviewed Miller's policy and concluded the sale met its suitability standards.

Medicare is one of several hot-button subjects Bankers Life uses in mailers and cold calls to spark interest in prospective customers. Once the person agrees to a home visit, Bankers instructs agents to ask a series of questions to identify the senior's financial needs and anxieties.

At one point, agents were taught that seniors store their primary fears in a "worry box." According to the training manual, "If you have done your job properly, you have disturbed them by opening their worry box."

Bankers president Scott Perry notes that agent training has been overhauled and no longer includes a "worry box." But probing to learn what most concerns customers is still a key part of the process.

"People make decisions through analysis but also by feelings," he says. "If we avoid the emotional aspect in the sales process, we do customers a disservice."

Regulators don't necessarily see it that way. Since 2008 the company has paid $2.3 million to five states to settle charges that its agents manipulate seniors' emotions to push them into buying unsuitable products, and citing the company for failing to properly supervise its sales force.

The company is also under investigation in Rhode Island, where the state insurance commissioner is seeking to revoke its license, and those of 20 of its agents for 41 violations of state law in 100 randomly selected sales of life insurance and annuities.

One common charge: Agents routinely persuaded seniors to replace existing annuities and life insurance with new Bankers policies, in some cases costing customers penalties or lost benefits, without showing how the new policies were better, as required.

The state also detailed a litany of customer complaints, including one from bank employees who called state police after a Bankers agent tried to transfer $60,000 from a 75-year-old handicapped woman's account (nearly all her savings) to buy an annuity. After the woman stopped the transfer and canceled the annuity, an agent and branch manager visited her home to try to talk her into keeping it, the state contends.

Perry says the problems are with specific agents (independent contractors, not employees), not the company itself. "These are practices we do not condone," he says.

Fear is a common persuasion tactic in investment pitches, says John Gannon, head of investor education at the Financial Industry Regulatory Authority (FINRA), which oversees U.S. securities firms. And it can sometimes lead seniors into making bad decisions, adds Anthony Pratkanis, a University of California psychology professor specializing in persuasion.

"Fear increases our tendency to adopt simple suggestions to remove the negative emotions and makes it more difficult to think critically," Pratkanis says.

How you can help:

Eliminate cold calls: "They just set your parents up for a high-pressure sales job," says Howard Gleckman, a long-term-care expert at the Urban Institute. Reduce the number of pitches they get by putting them on the Do Not Call list (donotcall.gov or 888-382-1222). Cut junk mailings at dmachoice.org.

Develop an exit strategy: For the calls that still get through, FINRA recommends that every senior practice a way to end the conversation -- even if it's as simple as saying, "No, I'm not interested."

Art Tener was an affable World War II veteran who missed the camaraderie of work after retirement, says his son Jim Tener, who is a project manager for a construction firm in Modesto, Calif.

So Art was happy to have the company of insurance agent Hal Hagendorff, whom he'd met at a financial seminar in 2005. Hagendorff came to Art's home 12 times, according to his dad's calendar, says Jim. They'd talk cars, planes, swap war stories, go to lunch.

Art believed the agent was working in his best interest. According to a lawsuit Art later filed against the agent and the seminar sponsor, Pro-Elite, Hagendorff never mentioned the $4,200 in commissions the products would pay.

When Jim sat in on a meeting with the agent to discuss his dad's finances, he was disturbed to learn that a benefit of one of the annuities was a rider allowing Art to withdraw money penalty-free if he was diagnosed with a terminal illness at least a year after he invested.

The problem: Art already had been diagnosed with pulmonary fibrosis, a lung disease projected to kill him in about two years. Jim says when he told this to Hagendorff, the agent looked at his dad and said, " 'Art, you look great. You've got another 15 years.' I said, 'My dad is almost 80. Do the math.' " Art died 18 months after buying the annuities.

Hagendorff told Money Magazine, "What we did was absolutely proper."

He referred further comment to Pro-Elite, which stated that Hagendorff discussed the annuities' terms with the Teners, went over the required forms, and repeatedly advised them to seek additional counsel: "Never did they raise any objection."

Jim says he learned about the sales too late to object, and his dad, trusting Hagendorff completely, didn't feel he needed outside advice. The Teners' lawsuit was settled; the terms are confidential.

Bonding over the kids and hobbies is a common tactic used to build the client's trust and blur the fact that this is a sales relationship, says Byron Cordes, president-elect of the National Association of Professional Geriatric Care Managers. It's a technique that's particularly effective with seniors who live alone or far from family.

How you can help:

Know their routine: Get in the habit of asking your parents about their friends and activities. You'll be more likely to spot changes in patterns. If you discover a new presence in your parents' life, question them, but don't criticize, says Laura Carstensen, director of the Stanford Center on Longevity.

"Children hear their parents talking to someone a lot and start yelling. The irony becomes that the only person your parent is having a good relationship with is the nice person on the phone."

Enlist their Doc's help: A new initiative aims to tap family physicians as watchdogs for signs their elderly patients are having money troubles (go to investorprotection.org for info).

Paula Span, author of When the Time Comes: Families With Aging Parents Share Their Struggles and Solutions, suggests you call their doctor if you're worried: "Say, 'Would you be willing to discuss this with my father?' Older people often invest doctors with knowledge they don't have."

Or 10%. Or more. The numbers vary, but the pitches have one thing in common. They promise high, maybe even double-digit, returns that are safe or "guaranteed" -- just the ticket for seniors concerned about running out of money because of stock losses or rock-bottom rates on CDs.

Regulators say the investments commonly promoted this way are frequently complicated, riskier than salespeople reveal, carry hidden costs, and may tie up principal that retirees need for living expenses.

But brokers and agents earn higher commissions on them than on plain-vanilla bonds and mutual funds and so are highly motivated to sell them.

In the past 15 years, New York investment firm David Lerner Associates has pocketed $600 million in fees from the sale of private REITs -- real estate trusts that don't trade publicly on stock exchanges as most other REITs do.

That makes it difficult for investors, who buy the high-yielding REITs primarily for income, to liquidate their shares and get their money back if needed. FINRA launched disciplinary action against the firm in May for providing misleading information about the REITs and targeting sales to "unsophisticated and elderly investors" for whom the trusts were unsuitable because of their illiquidity.

The REITs sold by David Lerner Associates, called Apple REITs, owned hotel properties; the most recent in the series offered juicy 8% dividends. But since 2008 the trusts have had to borrow money to make the dividend payments.

David Lerner Associates maintains the shares are still worth their initial value despite sharp drops in income on the trust's properties. Investors were originally told they could get their money back after three years. But when more investors than expected recently tried to redeem shares, they were told they had to accept an 8% discount.

David Lerner Associates, FINRA says, didn't properly communicate these issues when selling a new REIT in the series.

Founder David Lerner told Money Magazine that FINRA has it all wrong. He says the firm makes the REITs' risks abundantly clear before each sale (as long as the investor reads the 19 pages of risk factors in the 230-page prospectus and supplement for the newest trust) and that customers sign forms affirming they understand them.

"In 18 years, I don't recall one client complaint," Lerner says.

FINRA, however, has disciplined the company five times before for various infractions, including in 2005 for misleading investors in marketing materials with exaggerated claims about its investment prowess.

At least three other large private REITs have stopped redeeming shares in the wake of financial losses. Regulators believe the percentage of retirees in these trusts is high because their marketing pitch fits the senior investor profile.

Says Colorado securities commissioner Fred Joseph: "Seniors are desperately seeking alternatives to get some kind of return on their investment -- 5% to 10% sounds pretty darn good. But they shouldn't be taking on this kind of risk."

How you can help:

Be inquisitive: Ask the kinds of questions that regulators do: Are there high fees? Is it too complicated to understand? Will it tie up money your parent needs for living expenses and medical bills?

Work the chain of command: Too late? Contact your parents' broker to ask questions; follow up in writing with the firm's branch manager. Still no relief? File a complaint with FINRA (finra.org/complaint) and your state securities regulator, or the SEC, or seek arbitration to have an impartial judge decide a fair resolution.

Use their "free look:" Insurance buyers have a 10- to 30-day window when they can cancel for a full refund. If too much time has passed, your state insurance regulator may be able to help your parents nab a refund, says New Jersey insurance commissioner Thomas Considine.

Creating a false sense of urgency to imply investors have limited time to take advantage of an opportunity is a classic marketing ploy.

Joseph, the top regulator in Colorado, says it "pretty much shows up in all" of the senior cases his office handles.

It shows up in Illinois too. Last year Hartland Mortgage Centers, a reverse-mortgage lender in Woodridge, Ill., fell afoul of the state attorney general for listing an expiration date on a solicitation mailer; the return address on the mailing was "Economic Stimulus Information, Senior Benefits Division," not Hartland.

The deadline combined with the appearance of a government imprimatur is a particularly potent motivator for seniors, who tend to trust authority and obey rules such as meeting deadlines, says California elder advocate Prescott Cole, who co-wrote a 2010 report on the need for tougher reverse-mortgage laws. The report cited Hartland as an example of deceptive marketing.

Company president George Kleanthis says the intention wasn't to mislead but to stress that Hartland sold only government-insured reverse mortgages that provide extra protections to seniors. He claims his experience with the attorney general -- the company paid a $5,000 fine -- taught him the need for extra sensitivity in marketing to seniors.

Taking out a reverse mortgage is too involved a decision to be made in a rush, Cole says. The loans, which allow seniors to borrow against their home equity without repaying it as long as they stay in the house, carry high fees, can hurt eligibility for Medicaid, and may jeopardize a spouse or offspring's ability to inherit the house.

A 2009 report from the Government Accountability Office also noted problems with the loans being used to cross-sell other products.

FINRA fined and suspended Illinois broker Steven Delott last year after he recommended at seminars that seniors take out reverse mortgages and use the money to buy life insurance-- he suggested that using a $100,000 mortgage to buy a life policy with a $170,000 death benefit was the equivalent of earning a 70% return -- without presenting any of the drawbacks of that strategy.

Delott consented to a six-month suspension and will have to pay a $35,000 fine upon his return to the industry. The company that owns his practice, National Financial Partners, declined to comment on Delott's behalf.

How you can help:

Explore alternatives: Other options may provide a similar financial benefit at lower cost or with less risk. Instead of a reverse mortgage, for instance, your parents might be better off applying for a home-equity loan or line of credit or one or more of the many state and local government assistance programs that offer a break to seniors on property taxes, utility bills, home repairs, improvements, and other housing costs. (Find them at benefitscheckup.org.)

Have a second set of eyes policy: No legitimate financial product requires an immediate decision. Suggest that your parents make it a habit to always get another opinion -- yours or a financial planner's -- about any major money decision or investment they're considering, suggests Amy O'Rourke, a geriatric-care manager in Orlando.

If Art Tener had consulted his son earlier, Jim thinks he might have stopped his dad from making a costly mistake. Art, like many seniors, didn't want to ask for help. Jim says, "My father didn't want to look stupid."

Additional reporting by Ismat Sarah Mangla.

Correction: In this story, MONEY reported that the New York investment firm David Lerner Associates maintained that shares of certain Apple private real estate trusts were worth their initial value despite deteriorating financial conditions. The REITs themselves actually set the values, which DLA reports to customers. A Financial Industry Regulatory Authority complaint alleges DLA "was aware or should have been aware of valuation irregularities and other improprieties" and should have investigated more thoroughly before recommending additional Apple REITs to customers. DLA says it makes clear to customers that share valuations represent an estimated value only. It denies FINRA's allegations and plans to vigorously defend against the complaint, which is pending.