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Who's Most Vulnerable to Financial Fraud?

Christine Benz

Christine Benz: Hi, I'm Christine Benz for Morningstar.

The Madoff case was perhaps the best known instance of financial fraud, but incidences of financial fraud go on every day.

Here to discuss how seniors are often the targets of financial fraud, as well as what they can do to protect themselves, is Dr. Shelley Taylor. She's is a professor at UCLA.

Dr. Taylor, thank you so much for being here.

Shelley Taylor: You're very welcome.

Benz: I'd like to start with the general way of the land in terms of financial fraud. Can you share any statistics about whether it has increased, decreased in recent years?

Taylor: Yes. Financial fraud is going up tremendously quickly. There are over 30 million complaints a year, and those are just the reported ones. We know there are a lot that go unreported. And of interest, more than half of these complaints are filed by adults, who are age 55 and up, so it's true that older adults are disproportionately the victims of financial fraud.

Benz: So, can you make any generalities about the types of financial fraud that are growing in number over the past few years?

Taylor: Well, the most common ones are foreign lotteries, unauthorized billings to credit cards, weight loss scams, but the most expensive typically are the investment frauds.

Benz: You are a professor of psychology, and you've been looking at the intersection between psychological aspects that tend to make people more vulnerable to financial fraud. Can you share any of those commonalties?

Taylor: Yes. There are some interesting simple pictures you can draw of who is most vulnerable to different kinds of fraud. So, for example, lottery or charitable giving scams are more likely to be perpetrated on older women who live alone--typically women in their 70s.

On the other hand, investment frauds, which are the most expensive, tend to be perpetrated on men who are in their mid-50s, who are actually experienced investors, who have taken risks before, and who are pretty knowledgeable about investments.

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Benz: Can you conjecture about what would make that particular demographic vulnerable? Is it simply that men are out there investing more than women--I'm sure that's a piece of it.

Taylor: A piece of it is that fact. There are several reasons. One is that from age 55 on, people are coming into more of their funds. ... They have more capital to begin with. They may be transferring money from a 401(k) to an IRA, and so the money is moving, and when the money is moving, people tend to be targeted. They get phone calls. They get free dinner offers. They get mail solicitations, and experienced investors are often under the impression that they are good at this, and so they can pick the good ones out of these many opportunities, and they are just often wrong.

Benz: So, I know that there has been a lot of research about decline in cognitive functioning once folks reach a certain age, and of course, it certainly would vary by the individual. But can you talk about the intersection there, that if someone is experiencing some cognitive decline they might tend to be more vulnerable?

Taylor: Yes. That's clearly a factor. Particularly frauds among much older adults, and one of the things that offspring of aging parents need to do is keep a general eye on cognitive functioning, because as cognitive functioning declines, obviously money management skills aren't going up, and so that's when they may need to actually take a closer look at where the money is going, how it's being managed, and so on.

Benz: Now, what about [the fact that] the brain is different as we age? Is there anything that people should be aware of in terms of actual physical changes in the brain?

Taylor: Yes, it does appear that the way in which information is processed in older adults' brains is somewhat different from younger adults in ways that may make them more vulnerable. There is a region of the brain called the amygdala. The amygdala is one area that sends warning signals to people. It's what makes you think, "this doesn't feel right." It leads to stress hormones.

Older adults' amygdalas are less active. In some cases, there is actual shrinkage. It looks as though different parts of the brain, the insula being one, picks up some of those functions, but not with the same degree of alarm or concern.

So, on the one hand, this is great for older adults, because it means they don't experience scary things to the same degree as younger adults do. They are not as often on edge. But if there are environmental cues that they should be paying attention to, the brain may not be processing those particularly well, and so that's something for which our studies have tried to provide and have provided evidence.

Benz: This is just a normal part of the aging process. This is setting aside issues that might be going on in terms of dementia or Alzheimer's?

Taylor: Exactly, this is a normal part of aging. Older adults are less easily distressed by negative events. They look for a more positive outlook on life. It's a natural part of aging. It doesn't have anything to do with cognitive decline, but it may nonetheless make people vulnerable.

Benz: So, if you are an adult child of an aging parent, what are some things that should set off alarm bells or make you pay even closer attention to your parents' finances than you otherwise would?

Taylor: Well, I would say first general cognitive decline as we've already discussed. Second, if the parent is starting to be evasive or secretive about where money is going. And a third factor is new best friends. What you sometimes find is just preceding a major fraudulent event, there will be someone who has made their way into the older adult's life and gained that person's trust. Our work actually has focused especially on the fact that older adults don't seem to process cues to deception or untrustworthiness terribly well.

Benz: So what kinds of cues might those be?

Taylor: Well, let me give you an example. I talked to the high school teacher, who had spent his whole career helping kids find the right college and giving them advice, and he loaned $15,000, or believed he had loaned $15,000, to a nice young man as he referred to him, and all reports were that this was someone who was pretty unkempt, who was probably a drug addict, who had broken teeth, dirty clothes, and smelled bad. Now those are all cues that should tell you very quickly, this is not somebody to whom you want to give $15,000, but these cues had not had the effect that they would have at a younger age. So, it's that kind of thing. It's the inability both visually and also on the part of the brain to recognize factors that should be warning signs.

Benz: Now, how about for seniors themselves? Do you have any tips on how they can protect themselves against being victimized by financial frauds?

Taylor: Well, I think there are several things. One is the "just hang-up rule." When people call with solicitations over the phone, just hang up. It's hard to do, when people have been trained to be polite and nice, but that's important. Ripping up solicitations that come in the mail. Not going to free lunches and dinners. Those can often be a source of fraudulent extraction of funds. Not accepting hot tips from anyone, that's a general investment rule. It applies especially to seniors. And not going after a big score. One of the temptations that people experience, seniors especially that are close to retirement or in retirement, is that they need to make up money, or they feel they do, from the financial downturn, and so they're watching for a big score. Money isn't typically made on big scores, and so being wary of those kinds of potential opportunities would be another cue.

Benz: One thing that I've read is that, there may be some generational aspects to this as well. So, perhaps the folks who are in retirement, in late retirement, right now may be especially polite versus the folks younger than them. Would you say that that might be an aspect here as well?

Taylor: It's exactly right. One of the things we find is that our older adults are typically more trusting. So, if we ask questions about can people generally be trusted, the older adults are much more likely to say yes than the younger adults do. So, I think that we've become a less-trusting culture over time, but we've left a quite vulnerable older adult group.

Benz: Dr. Taylor, this is terrific insight, and we very much appreciate you sharing it with us. This is a very important area, and I look forward to what you and your group are working on in the future. Thank you for being here.

Taylor: Well, thank you very much.

Benz: Thanks for watching. I'm Christine Benz for