To the North American Securities Administrators Association (NASAA), there are plenty of modern-day Willie Suttons eager to go “where the money is.” Today, “the money” is largely held by seniors. Hence, regulators say, seniors are the targets of unscrupulous salespeople armed not with pistols, but with professional designations that exaggerate their competence or their concern for seniors’ well-being.

Now some of these individuals are being sought out not by potential clients, but by federal regulators, including the SEC and FINRA. These regulators are making it clear that advisors who use the word “senior” or various synonyms to transact business unethically are squarely in their sights. These individuals are “among [regulators'] top targets,” says Tracy DeWald, general counsel at Securities America, a broker-dealer based in Omaha, Neb. “People age 60 and over are the biggest source of regulatory complaints.”

Targets

Indeed, seniors are targets for all types of unscrupulous vendors. In the financial world, many of those engaged in unethical practices—or merely failing to make adequate disclosures—hold designations that include the words “senior,” “elderly” or “retirement.” contrary to the unethical practices, the designations indicate that the holders are experts in serving the financial needs of senior citizens.

The burgeoning controversy has prompted some reputable firms to take action to avoid being tarred by the same brush. These firms have been limiting the ways their people may use some “senior” designations when doing business. According to NASAA, some product salespeople using “senior” designations typically invite senior citizens to seminars where a free lunch is served along with a presentation on investments. Either at the seminar or through follow-up contacts, some advisors ultimately sell unsuitable investments to some of the attendees.

In April, NASAA introduced a model rule on the use of senior- specific certifications and professional designations. This rule, which prohibits the misleading use of designations that include words like “senior” and “retiree,” has already been adopted by the state of Washington. At press time, New Hampshire was set to adopt the rule and other states are likely to follow suit. A report issued last year by NASAA, FINRA and the SEC lists the popular Certified Senior Advisor (CSA) designation among those it considers misleading or confusing.

That’s not to say that the mere use of the word “senior” will automatically spur regulatory scrutiny. In its model rule, NASAA leaves room for certain designations to be recognized. “Regulators are drawing a distinction between designations that are earned and those that are bought like prizes in a Cracker Jack box,” DeWald says.

What distinguishes a real designation from a specious one? “An authentic designation requires you to pass a difficult test,” DeWald explains.

In addition, DeWald adds, “there are continuing education requirements and you can be kicked out if you violate the rules. On the other hand, there are some designations that you can get by writing a check and spending a couple of hours online. Some are just made up by the person using it.”

NASAA, FINRA and the SEC are by no means the first to recognize the potential abuses of professional designations, especially when it comes to seniors. Some states, including Massachusetts and Missouri, have filed complaints or cease-and-desist orders against people for giving inappropriate investment advice to the elderly while using the “senior specialist” title. Underlying these charges is the idea that certain designations imply specialized knowledge or training, lending credibility to salespeople.

Forbidden Credentials

Some broker-dealers have effectively banned reps from publishing senior-related credentials. Genworth Financial, for example, prohibits its employees and agents from using the CSA designation (the most common senior designation) on their business cards or in their marketing materials.

“We have a similar policy,” says DeWald of Securities America. “In fact, we have lists of which designations are acceptable in published materials and which aren’t. None of the ’senior’ or ‘elder’ designations are on the accepted list. Some of our reps have these designations, which they can mention to clients in conversation. They can’t put the letters behind their names to promote themselves.”

Comparable cautions are in effect at major brokerage firms, says Sean Walters, deputy executive director at the Investment Management Consultants Association (IMCA), which confers the Certified Investment Management Analyst (CIMA) designation. “We work mainly with full-service wirehouses,” he says. “They’re paying a lot of attention to designations, including those aimed at seniors, and deciding which ones should be approved for use.”

Designations are also under scrutiny in the fee-only universe. “At NAPFA, we looked at senior specialist designations,” says Tom Orecchio of Greenbaum and Orecchio, a wealth management firm in Old Tappan, N.J., and chair of NAPFA’s board of directors. “The vast majority were not worth anything, we felt. They don’t require much studying or continuing education. There are too many credentials around; the last thing we need is more clutter,” he says. The one exception, Orecchio notes, is the Chartered Advisor for Senior Living (CASL). “It’s offered by the American College and [courses for it are] taught like courses for the CLU and ChFC.”

9,500 Strong

Of all the senior-oriented designations, the CSA is the only one mentioned specifically by states, including Nebraska, when warning seniors to check the credentials of so-called senior specialists. Several of the individuals identified in state regulatory actions hold a CSA.

The CSA designation is conferred by the Society of Certified Senior Advisors (SCSA), which bills itself as the world’s largest membership organization for professionals seeking to improve their skills in working with seniors. More than 9,500 advisors now hold a CSA designation.

SCSA executives are quick to defend their organization. “We’re aware of regulators’ concerns that certain professional designations may be misperceived by the public,” compliance specialist Bill Kaluza says. “That’s why SCSA requires each CSA to provide a written disclaimer to clients and potential clients.” This statement, while asserting that designees have taken steps to bolster their knowledge of seniors’ financial needs, includes notification that “the CSA designation alone does not imply any expertise in financial, health or social matters.”

Of course, whether all 9,500-plus CSA designees are actually making this disclaimer to every potential client they approach is difficult to determine. Kaluza says SCSA makes an effort to police its designees. “CSAs themselves are often our most reliable reporters about CSAs who do not comply with these rules,” he says.

What’s more, Kaluza claims that when a member of the public contacts the SCSA to inquire about a particular CSA, the organization investigates to see whether the CSA in question actually provided the disclaimer. “To date, we’ve had very little indication that CSAs are not using the statement,” Kaluza says.

By Donald Jay Korn
August 1, 2008

NEW YORK — Investors who reach retirement face the difficult task of estimating how long they will live — and how long their nest eggs should last.

A new type of mutual fund introduced by Boston-based Fidelity Investments and Vanguard Group of Valley Forge, Pa., seeks to make that task easier. The funds try to maintain a payout that can be sustained for many years.

Perforce, the new funds must make a tradeoff between expense and payout, one that poses risks and rewards for investors.

With millions of Baby Boomers set to retire, mutual fund companies, insurance companies and financial advisors are battling over retirement savings, estimated at $16.4 trillion at the end of 2006. Fidelity last week launched 11 Income Replacement funds and the Vanguard plans to launch three Managed Payout funds, each of which are meant to help retirees receive a regular payment while they remain invested.

Traditionally, the role of maintaining a steady income has been taken by fixed annuities. The new funds don’t have the higher expenses of annuities — but also, significantly, offer no guarantee that investors won’t outlive their assets, the heart of an annuity.

“In general, the fact that they’re launching these products is great,” said Brad Levin, a certified financial planner and president and founder of Legacy Wealth Partners in Encino, Calif. “Retirees are just not prepared for what they’re going to be facing as they go into retirement.” But he worries that investors in the funds “could make mistakes that cause them to run out of money.”

An insurance industry executive, who wished to remain anonymous — and whose industry competes with fund companies — said mutual fund companies should be applauded for trying to address sustained retirement income, but “without the presence of a guarantee” as in an annuity, “I don’t think they’ve gone far enough.”

Fidelity and others say the new funds weren’t meant to be annuity clones.

“This is just another arrow in the quiver for investors to use,” said Boyce Greer, president of fixed income and asset allocation at Fidelity Investments. “We wanted to provide an income vehicle that had very different characteristics than an annuity.”

Fidelity’s Income Replacement Funds are a series of 11 funds of funds combining an asset allocation strategy with an optional monthly payment program, which is offered at no cost. The funds carry “horizon dates” from 2016 to 2036, meaning the income stream from the funds are expected to end on those dates. The funds begin with a more aggressive asset allocation weighted toward equity funds and gradually shift to a more conservative allocation emphasizing fixed-income and short-term income funds.

Each of Vanguard’s Managed Payout funds is a fund of funds that will invest primarily in other Vanguard funds, including domestic and international stock index funds, bond and REIT index funds and inflation-protected securities and money-market instruments. The funds will also invest in commodity-linked investments and market-neutral or other “absolute-return” strategies, and are expected to sustain annual distribution rates from 3% to 7%.

The Vanguard Managed Payout Capital Preservation Fund offers an annual distribution rate of 7%, but no guarantee that the fund won’t eat into principle to make that distribution.

Dan Culloton, a senior analyst at Chicago investment-research firm Morningstar Inc. who covers Vanguard, said that while the funds don’t offer annuity-like guarantees, they offer more control over capital, he said.

Ellen Rinaldi, a principal in Vanguard Group’s investment counseling and research group, said, “many people are heading into retirement without any structure and withdrawing without any idea” what makes a sustainable income stream.

Greer of Fidelity said that if the funds came with a guarantee, they would not be able to offer the heightened liquidity — as mutual funds, they can be sold at net asset value and have no lock-up period — or low cost they currently offer.

Product Evolution Expected

Levin, the financial planner, said the new funds require that investors choose the appropriate income stream, but it’s not uncommon for investors to underestimate their lifespans. It’s generally understood that a 4% or 5% retirement account withdrawal rate is sustainable, he said, but an unsophisticated investor would likely choose an option offering 7%. “But can they really deliver that kind of payout over the long term?” Moreover, he said market volatility also puts a premium on advice to investors making these types of decisions.

Greer said Fidelity tells investors to be conservative and plan on living into the top quartile of life expectancies — age 92 for a man and 94 for a woman — and that the firm’s online tools prompt investors to do so.

Fidelity views the funds as building blocks, not necessarily as a place for an entire nest egg, and envisions several uses for the funds, Greer said. For example, an investor who wants to retire early or who wants income before he retires could time the Income Replacement stream to end when his defined-benefit plan or Social Security payments kick in, Greer said. Or because many retirees spend more in the first few years of retirement, they could use the payment stream for discretionary expenses, such as travel or sports club memberships, during that period, he said.

“My guess is that we’re going to find that they will be used in situations that we never foresaw,” said Greer.

As for the importance of an advisor, Culloton said, you could say the same for selecting mutual funds. Rinaldi of Vanguard said that while seeing an advisor is a great thing to do, there should be solutions for those who choose not to. “That’s one of the things we’re doing here.”

Morningstar’s Culloton said that these income distribution mutual funds are intriguing, yet imperfect options, that will evolve. “The whole idea is kind of a sea change in how people are thinking about their investments,” he said, with a shift from a focus solely on accumulation to a focus on whether or not investors are in a portfolio that will meet their retirement needs. “Financial institutions like Fidelity and Vanguard are going to figure out how this works, where it can be improved upon and how they can do that.”

Greer said Fidelity will take lessons from the market and apply them. “New products will be striking the balance between guarantees for life, liquidity and flexibility and cost,” he said.