At 51, Adela Pena decided to follow her financial adviser's advice and retire early from her job in inventory and warehousing at AT&T after nearly 30 years.
Slightly nervous, but convinced by her adviser's assurances that she would never run out of money, Pena collected $320,000 through a company buyout and by cashing in her 401(k) account and invested it in a variable annuity.
The arrangement started off well. Pena, who's now 63 and lives in San Jose, Calif., received a $2,300-a-month allowance from the annuity. Her total investment soon grew to $700,000, but the plan went downhill from there.
By 2007, when Pena switched to a new financial adviser, the value of the annuity had dropped to just $202,000. She reinvested the money in a new annuity, hoping to recover some of her losses and agreed to lower the amount she withdrew monthly to $1,700.
Within a year, however, the value of Pena's new annuity declined further to $49,000. Today, she subsists on her $1,892 monthly Social Security check and help from her children. Pena is now taking legal action against her initial adviser in hopes of recovering some of the money she lost.
"She made it sound like we were going to have money for the rest of our lives," says Pena, who says she gets depressed thinking about her lost savings. "It's inconceivable that someone can do that."
Pena's experience is not isolated. In a 2008 survey of financial planners conducted by the Certified Financial Planner Board of Standards (CFP Board), 61 percent reported having at least one client who came to them after having a bad experience with another financial professional.
"Unfortunately, it's not unusual," says Eleanor Blayney, a certified financial planner and the CFP Board's consumer advocate. "It can range from just simply not having the right adviser to outright misinformation to something more criminal."
Avoiding bad advice can be tricky, Blayney says, since many financial professionals aren't subject to government regulation. As part of a series of financial reforms enacted in 2010, federal officials are now conducting a study to look at how financial planners are regulated and whether gaps exist. This could lead to greater industry oversight in the future.
The 2010 financial reform legislation established a consumer watchdog agency that opened in July. The agency – known as the Consumer Finance Protection Bureau – just launched a special Office of Older Americans. Hubert “Skip” Humphrey III was appointed in October to lead the office. He is a former Minnesota attorney general and a former member of the AARP board of directors.
AARP has been making recommendations to the Office of Older Americans based on feedback from members. The office will be specifically designed to promote financial literacy among older consumers, to help prevent abusive practices and to monitor the certifications of financial advisers. It will also serve as a place for older consumers to obtain financial information and assistance.
Until the Office of Older Americans is fully functional, here are some places you can go to for financial protection information:
- The Administration on Aging has Elder Rights Protection resources.
- The Securities and Exchange Commission offers some tip sheets and resources.
- The FTC offers information on avoiding scams and fraudulent business practices, particularly those that advertise in ways that make them look like legitimate opportunities.