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Listen as Jack Marrion discusses selling in a market where an increasing number of seniors face cognitive changes.

Jack Marrion is president of a research consultancy that publishes the Index Compendium newsletter, the consumer education materials of Safe Money Places and the Advantage Compendium research studies. He is frequently referenced by regulators and in SEC rule filings relating to annuities, as well as appearing as an expert witness. His first index annuity book Index Annuities – Power & Protection is regarded as the ultimate text on index annuities.

Jack’s insights on the annuity and retirement income world have appeared in hundreds of publications, and in 2006 the National Association of Insurance Commissioners asked him to address their annual meeting and teach regulators the realities of index annuities. He was invited back in 2009 to talk to the NAIC about the effects of aging on senior decision-making. Best’s Review said he was likely to affect the course of the industry. He has an MBA from the University of Missouri and his doctoral studies in the area of cognitive bias in decision-making form a new paradigm in the marketing and development of retirement income products.

Matt Sawyer: Thanks to all of you for taking the time to join us today. My name is Matt Sawyer; I’m the VP of Sales here at WealthVest Marketing.

Today we’ve got a great program for you. It’s very timely, number one, and it’s also very important to us as professionals in the industry and as we look towards the future in the industry. It surrounds the court case of Glenn Neasham, or as we’ve renamed it for the purposes of our webinar today, “The Neasham Effect.”

I’m sure we’re all familiar with the case. Back in 2008, Glenn Neasham sells a fixed indexed annuity to an elderly client in California. In 2010, the suitability is called into question, and in February 2012, Mr. Neasham was sentenced to 90 days in jail of a 300-day sentence.

I’m sure a lot of us on the call followed this very, very closely and asked ourselves as we saw it transpire that there’s got to be more to this story. We could not have seen everything.

The Wall Street Journal, in March of this year, reported that the then, State Insurance Commissioner, Steve Poizner in California, made the statement, “Agents who steal from vulnerable seniors, will not get away with their shameful tricks.” As you look at the case itself, there seems to be a glaring lack of shameful tricks.

If you look at some of the key points:

  1. The clients had specified they wanted a CD alternative
  2. They had familiarity and were happy with previous index products that they had purchased
  3. Ms. Shubert’s long-time boyfriend testified that she was aware and mentally competent to purchase, and the case was cleared through rigorous suitability and we all know that has been rigorous and it is getting more rigorous.

So clearly, there is more to the story, and as we look forward, this situation has a great probability of presenting itself in years to come.

You know as the Pew Research Society tells us that beginning in January 1 of 2001, 10,000 baby-boomers every day will reach the age of 65, and that will occur for the next 19 years. So we’re going to be faced increasingly with older clients having to make purchase decisions, and for ourselves as professionals, we’ve got to understand the cognitive changes that occur as we age, how that affects our ability to make decisions, and ultimately how we identify, as we sit with a client, if they do have an impairment. Because it would appear as though, based on this court case, that’s going to be more and more our responsibility as professionals.

Now in order to do that, and somebody who’s a good friend of ours here at WealthVest Marketing, we’ve got Jack Marrion to talk about this.

Jack is the President of a Research Consultancy that published the Index Compendium Newsletter, consumer education materials of Safe Money Places, and the Advantage Compendium Research Studies. He is frequently referenced by regulators in SEC rule findings related to annuities, and he’s appeared numerous times as an expert witness.

His first index book, Indexed Annuities Power and Protection, is regarded as the ultimate text on index annuities.

With that, Jack, thanks so much for joining us. Welcome!

Jack Marion: It’s good to be here.

What I hope to talk about today is not the Neasham case, but the factors surrounding it.

A lot of my research, when I was doing my doctoral work, was on senior decision-making, and this really brings to the forefront why that’s important, the changes that are occurring, and how they can affect you all. So what I hope to talk about is kind of a potpourri of things. We’re going to talk a bit about elder abuse laws, we’re going to talk about cognitive changes, and finish up with some things that financial professionals can do to more effectively help their clients make better decisions.

I’m going to kind of get going with this. If you have questions, go into the Chatbox, type away, and I’ll try to address the questions. But let’s start off with what happened with the Neasham case.

He was convicted under California Penal Code, Section 368, which essentially is theft from an elder; that’s what happened. The question you get at this point real early on is who is an elder, who is a senior, and that depends on who you’re talking to. If you’re talking to the AARP or looking at several academic studies, the age 50 is the transition point in which someone becomes elder or senior.

If you’re talking about the U.S. Senate Committee on Aging or some of the states that have passed elder abuse laws, they say you turn into a senior at age 60. FINRA, NAIC, the SEC and a few other states say that you magically become a senior at age 65; however, these are all arbitrary dates. There’s no basis in science behind them, they’re just dates that were pulled out of thin air and everybody else went with them.

From a research point of view, and from a decision-making point of view, people really don’t become senior, which means changes in their thinking patterns, until age 80. So really, if we’re going to set up senior guidelines, you would say that a person is a senior at age 80 or later, when it comes to making financial decisions. Now we’ll see how this thing changes as it goes on.

But there is a change in the way we think. The way we make decisions is based on our collective wisdom. It’s made up of two parts; one is fluid intelligence, the other is crystallized intelligence. To get away from all the jargon, fluid intelligence is kind of like having a process, if you think of computer terms. Your brain is a processor. It takes in data, it uses the data, processes it, and arrives at a decision. Crystallized intelligence, to continue the computer metaphor, is more like the hard drive. You store knowledge on the hard drive and that builds up over time.

Now one of the arguments made by some folks is that your fluid intelligence is lessened as a senior. Well, that’s true, but your fluid intelligence starts declining after you get age 13 or 14. You’re not as sharp at age 20 or 25 when it comes to processing data, as you were at age 15, and it’s a steady decline from your teenage years until the day you die. At some point in time, it really drops off typically after age 70.

However, our wisdom increases because we’re learning during our early years and we keep adding this knowledge to our hard drive. So when you combine the working memory, the fluid intelligence with the stuff in the hard drive, the ability to make decisions and the quality of our decisions steadily increases and actually comes to a peak in our 60’s. We are making our best decisions, especially from a financial point of view in our 60’s, because that’s the perfect point of both crystallized intelligence and fluid intelligence.
After that point, you can’t take in as much on the hard drive, the hard drive is essentially getting full and you can’t gain that much new knowledge, but you still have the fluid intelligence falling off. So in your 70’s, you do begin to see the wisdom begin to decline, but it doesn’t mean you’re no longer wise.

If you look at my chart there, somebody in their 70’s or early 80’s is still doing as well in decision making as people in their 20’s, 30’s, and 40’s. They can still make good decisions. Even if they fall below the level where they can typically make great decisions, which happens sometimes in the 80’s or 90’s; they can still be helped to make good decisions if you follow certain decisions patterns and help them make better decisions, and I’ll get to that at the end.

These are cognitively unimpaired people. These are people that have all their faculty. Even people that have no dementia and have no impairment still realize a decline in the powers of reason, but it does not mean they make worse decisions, it just means the way they make decisions have to be approached a little differently.

So I’m throwing all of these different definitions. We should probably get to three important ones.

One is I talk about “cognitive” or “cognition,” and that just means thinking.

The other term I throw out is “dementia” or “demented.” It may not be politically correct, but it’s a good term because it means that the intellectual faculties have all deteriorated and you can no longer make rational decisions.

Somebody that has Alzheimer’s disease has dementia. Somebody who also has senile dementia, vascular dementia, or any type of dementia; these are all states of dementia, so dementia and Alzheimer’s are synonyms.

Mild cognitive impairment means you can’t make decisions as well as somebody else your age. That does not necessarily mean you can’t make good decisions. It just means some parts of your decision-making capacities have failed and you need to take that into account.

Somebody with dementia is easy to spot if you spend any time with them because it will be apparent that they won’t have all their marbles in making good decisions.

Somebody with mild cognitive impairment or MCI may appear perfectly normally because they can typically function in the day-to-day world. They may also be able to make perfectly good investment decisions, because typically, somebody with mild cognitive impairment can still process things on a macro or a global level.

For example, somebody with MCI can understand why you would buy an immediate annuity, and the fact that that provides an income for as long as you live, and that can be a good thing. They can understand why they should have perhaps more stocks than bonds in their portfolio to get a higher risk return ratio. They understand those concepts, they can process those concepts, they can be rational about that and make good decisions. However, the same person may not be able to understand if you got into the alphas, the betas, and the financial math.

So if you want to think of it in a little tighter perspective, somebody with MCI understands what a checking account is for, what being overdrawn means, but they can’t balance their checkbook. It doesn’t mean they can’t still write checks, it doesn’t mean that they still can’t make good decisions, but they need help with certain aspects of their decision making.

When does this begin affecting your clients? According to a huge study, the Plassman Study, P-L-A-S-S-M-A-N, concluded a few years ago that there’s very little evidence of dementia before 80. And if look at people in their 70’s, one out of 20 people has full blown dementia and three additional ones have mild cognitive impairment.

This means for somebody under age 80, most of them are going to be able to figure out and make a rational decision when it comes to finances. Three of them might need a little help. One of the 20 can’t do it, they just don’t have the capacity. But that’s still only 20% of the people out there in their 70’s.

When it comes to working with your clients, fewer than 20% have dementia or cognitive impairment because there’s a self-selection element that goes on. People with dementia typically aren’t looking for financial professionals to do business with. Financial professionals typically aren’t going into nursing homes and looking into the intermediate care areas for new clients. So in your practice, you may have no one with dementia or impairment, or it’s going to be much less than 20%.

But even without that, in your 70’s, the people with cognitive impairment are relatively few. That all changes when you get to age 80. By age 80, a quarter of the people out there have dementia and another quarter has cognitive impairment. Even though there’s an element of self-selection, it still means the likelihood of the person across the desk from you, if they’re age 80 or older, has some type of cognitive impairment.

That’s a big factor and this is one of the key points of the talk. The number typically thrown around, and I’m not sure where they got it from, by regulators is 1 out of 5, 85-year-olds have some type of impairment. The reality is based on this Plassman study, or similar studies taken since then, is over half of the people age 85, would have some type of impairment and 1 out of 4 of them would have dementia and would be unable to make rational decisions. If you talk about the 90’s, it gets even worse.

What does this mean? If you’re typically dealing with clients under age 80, dementia and mild cognitive impairment is not going to be factor. You’re going to run into it, but it’s going to be very seldom. If you’re dealing with clients in their 80’s or their 90’s, you’re definitely going to run into impairment and you’re definitely going to run into dementia.

It’s going to be a fact of life, and it’s getting worse because we live longer. Unfortunately, people living longer because they can replace arteries and do a lot of organ replacement, but we still haven’t figured out a way to replace the brain, so that body part seems to hang on schedule while we’re keeping everything else propped up. So dementia and impairment are becoming a bigger factor in this whole area.

There are ways to test it. I have four of them here. They all test for dementia; most of them test for mild cognitive impairment. Two of them can be done over the phone. The top one there, the BOMC Test is six questions. It’s done often by lay people. They can do it in their office. It takes about three minutes and it has a very high success rate for detecting a cognitive impairment.

There’s nothing to stop a financial professional from giving this test to a client, but that raises the question should you? And do you want to be put in a position of having to give that type of test to a client? That’s one of the big questions that we don’t know yet and it will be talked about in years to come.

You really don’t want to upset a client who’s having a senior moment and mistake that for dementia because there’s a big difference. Everyone has senior moments. We have senior moments when we’re juniors, we just don’t call them moments because it doesn’t bother us at age 35 if we left the coffee pot on and walked away, but it really bothers us at age 60 if we left the coffee pot on and walked away, even though it’s the same type of forgetfulness.

A senior moment is momentary forgetfulness, it happens to everyone. Dementia is more pronounced and it needs to be detected.

The question raised on that point is if a person has dementia or is cognitively impaired, does that mean anything you recommend to them is unsuitable? And the answer is, not based on the specific reading and writing of the Regs.

There are two new Regs coming out from FINRA this summer. They’ve revised the Suitability Regs and they’ve updated the Know Your Customer Regs.

A couple of a years ago the NAIC passed a new suitability and a new transactions Reg that’s been adopted by the major of the states. These are all new suitability Regs and not one of them says anything about the mental status of the buyer. Suitability Regs tend to be quantitative. They ask questions about age, income, and assets. Even goals and risks, things you can map out on a scale. Everything is very quantitative, and from restrict suitability point of view, it is irrelevant if the person has dementia as long as the product is suitable for their financial situation.

That’s really just a point of discussion at the moment because nobody has really investigated this, but that’s something we’re going to be looking at in future years. Just because you have dementia, according to the way the current Regs are written, does not mean that the product is unsuitable.

Now the concept of mental incapacity is gaining strength in the regulatory world and they are looking at this more closely. The NAIC looked at it in 2003. FINRA and the NAIC have come out with notices saying you need to be aware of dementia and mental impairment in your older clients, but it’s really still in the exploratory stage.

What got Neasham in trouble was somebody interpreting a person with dementia and the solution to the person’s financial problem as elder financial abuse.

Now I’ve got some things listed here that are classic elder abuse. You can read them, but what they all amount to is theft. If you steal from any adult, that’s abuse. If they are impaired, that’s elder financial abuse.

Now when does elder financial abuse occur from a legal point of view? There was a study done seven years ago, published in California, that elder financial abuse occurred when these things happened on this page.

First, they had to be a vulnerable senior. Second, the transaction has to be kept secret. Third, no third party looks over the transaction. Fourth, the benefit is not proportioned to the assets, and fifth, the transaction is not in writing, not disclosed, that presents a conflict of interest.

Now this study was signed off by 166 California District Attorneys, Police Detectives, and senior care workers, and they said that all of these must be in place for elder financial abuse to occur. However, looking at the Neasham case, the senior and the transaction were not kept secret. The benefit was proportioned for the assets because there was no loss at any time taken by the senior, and the transaction was most definitely in writing and it was disclosed. So according to the rules of the State of California, no elder financial abuse occurred in that transaction and yet, there was a conviction for elder abuse and a prison term.

What that shows is the interpretation of the laws for elder abuse are all over the map. In 30 of the states, there are no elder abuse laws. Everybody over the age of 18 is treated the same. If you are an impaired individual whether you are 20 or 80, you are treated special. You are given extra protection under the law, but there’s no age limit. It’s based on impairment.

In a few states, California being one of them, elder abuse is a felony. It’s a criminal offense and it can result in a prison term. In most other states, elder abuse is a civil matter. The most that can happen is a fine for the person that has committed the action, or they can be sued in civil court for damages, but it’s never a criminal case. In some states, like my home state of Missouri, the elder abuse laws provide a safe harbor for people that have made a good faith effort to assist the elderly and they cannot be accused of elder abuse.

My suggestion on this point is read your elder abuse laws, talk to an attorney about elder abuse in your state because it’s very state specific. I mean my doctorate was not a jurist, it was in behavior and this does not constitute legal advice, so please talk to someone who actually knows their stuff in the elder abuse area.

The other problem with this whole elder abuse area is that claims are often exaggerated. It does occur. There’s no doubt that it occurs, but some of the claims are exaggerated because there are groups that benefit from large numbers of people being abused.
An oft-cited study quoted from 2000, says there were 5 million cases of elder abuse. If you type “elder financial abuse” into Google, you’ll see this 5 million figure quoted time and time again; however, that’s based on an article in a magazine called Consumer Digest. And to be polite, let’s just say it’s not quite the same as Consumer Report, where the reporter misread the study.

Instead of seeing that there were actually 21,000 cases of abuse, he thought is said 200,000 and then multiplied that times 25 – we have no idea where he got that number from – and said there were 5 million cases of abuse, when there actually were 21,000 cases of abuse. Even counting the ones that are unreported, you can’t stretch this out to much more than 37,000. And yet, this 5 million figure is thrown around constantly.

This hasn’t gone away. In March of this year, an SEC Commissioner spoke on elder abuse and said there were 7 billion seniors who were victims of financial fraud, but he was using a survey that was not conducted by academics, it was conducted by an Internet company, and the question was not “Have you been defrauded?,” it was “Have you been defrauded? Have you paid more than you thought you should have paid in fees? Have you bought a product you think you should not have bought?”

I mean a whole bunch of stuff in one question, but the SEC used this to say there were 7 million people being defrauded, which was not even the correct answer. The reality is, we don’t know how many people are being abused. Best estimates are half a million to a million people, which is still a chunk of people out there.

Two things to know is most of the abuse is caused by family members and caregivers, and financial professionals rarely are involved in the abuse. I did a search trying to find financial professionals that had abused seniors. If you look real, real hard and broaden your definition of abuse, you might find a few thousand cases a year, but what that means is financial professionals are responsible for maybe .005% of the abuse cases. It’s a negligible number.

What you really need to be aware of, and your most important role in this whole role of elder abuse is being aware of elder abuse done to your clients. If you see your clients changing their beneficiaries to somebody you don’t know or all of a sudden you see a power of attorney to someone new in the picture, that should set off a red flag in your mind. You all need to set up procedures to determine what will happen if you think you spot signs of elder abuse so you can go to the State agency and file a report. Your biggest role in elder abuse is preventing it by preventing family members and caregivers from abusing your clients. Okay, that was the elder abuse.

There are some things you can do to help people make better decisions, this assumes they don’t have dementia, but it takes in the reality that we do make decisions differently as we age, especially past age 70, 75, 80 years old.

A way to look at it again using the computer metaphor is a young person’s brain is like Wi-Fi processing to a Pentium chip. An old brain is like using a modem and going to floppies. You’re still processing when you’re older, but you’re processing at a slower speed and you can’t take in as much data. So what you need to do, with everyone, but especially with those older than, say 75 or 80, is take your time. Go slow, be repetitive, and take breaks.

Study after study has found that seniors can make decisions just as well as juniors if you follow these three main steps:

  1. Take breaks often
  2. Don’t rush through stuff
  3. Go over key concepts time and time again

Other things that help:

  1. Meet in the morning instead of the afternoon or evening
  2. Try to keep the shop talk and the jargon down. We all do insider speak, and it’s not good at any age, but it’s worse if you’re older
  3. Try to control the choices so you’re not overwhelming the person with too many decisions

We all want everything in the candy store, but if you give somebody the key to the candy store, they may often freak and not choose anything. You need to bundle up the candy and break it into bite-sized decisions, make a decision for one group, then move on, then move on, and then move on.

Then there are the physical elements:

  1. You need good lighting
  2. You need good contrasts. None of this light blue and light green stuff. You need black on white or dark red on light blue, that sort of thing
  3. Cut out the background noise. Don’t even have Mozart playing in the background. Make it a white room with no noise
  4. No one does multitasking well, and it’s even worse when we’re seniors, so do one thing when you’re working with a senior, finish it and move on to the next

There are some other things you can also do:

  1. Fewer graphs and charts are better than more graphs and charts, so limit the graphs you’re showing
  2. Quit using 10-point fonts; try to use 12 and 14 sizes so they can actually read it
  3. Try to address the shortcuts that the seniors tend to go to when making a financial decision. Because they’ve been making decisions for so many years, seniors tend to immediately focus on three things: Safety, Liquidity, and Returns, so you need to address those areas first and foremost, before you move on to the other aspects of the investment insurance product that you’re talking about

So, disclose the elements, do them simply, do them slowly, and be repetitive.

To kind of end this up where we started, are the odds pretty strong or are there any odds that you could wind up in prison for selling an annuity, mutual fund, or an advisory service to a senior? Probably not. It’s very unlikely, impossible in some states, even in California.

That’s what I have for today.

Matt Sawyer: If anybody has any questions, you can type them in the bottom right hand corner, hit “Send” and they will come through. We’ll just wait for questions for a few seconds.

All right Jack, it looks like as usual, you did a fantastic job. Great information, and obviously information we want to perhaps go through time and again, as this becomes a much more important part of the planning that we do for clients.

As I said before with the demographics, certainly it’s going to be a concern for us. Oh, there is one question Jack.

Michelle: Why was Neasham convicted?

Jack Marion: I don’t know. You’d have to ask the District Attorney and the Jury.

Matt Sawyer: As I read though a lot of that stuff, it wasn’t clear to me either, Michelle.

Jack Marion: Technically, Neasham is out on appeal, so he’s not in jail, he’s out on appeal.

Matt Sawyer: Well, I tell you, everybody on the call today will receive a follow up e-mail from us. It’s going to contain a link to the recording of this particular presentation. There was a lot of information that was covered and if you want to watch it again, you’ll have the ability to do that. Also, if you want to share it with anybody, you’re obviously free to do that as well.

The other thing you’ll get on that e-mail is a PDF that talks about something that we call “AdvisorDeck.” It is a proprietary, first of its kind for financial services, website that can help you really do a lot of different things from an inbound marketing perspective with your business.

We talk to folks all the time that do have websites, but the websites are very static business cards. The AdvisorDeck will do a couple of things for you. It will help you generate business. We use geotagging, we put new content on the site so that it will allow you to actually increase your searchability in your specific area and allow you to generate leads off the website.

It will help you stay in contact with you existing clients and also help you save time and money because it is a one platform turnkey, which is far less expensive and time consuming than many other options that folks are using today for their websites, so take a look at that as well.

If you want to call us at anytime, please do so. The number for WealthVest Marketing is (877) 595-9325.

I’d just like to finish up by saying, I know how important your time is. I thank you very much for the time you’ve taken today, and also for the business that you’ve sent to WealthVest.

Have a great Wednesday and we will talk to you next time. Thanks.