Common sales practices may cause millions of elderly Americans to be duped into buying risky and unsuitable investments, a coalition of consumer groups and securities regulators said Tuesday.
Increased regulation of the investment industry is sorely needed to counteract these practices, said representatives from the American Assn. of Retired Persons, the North American Securities Administrators Assn. and Consumer Federation of America at a joint press conference in Washington.
However, some coalition members said the new Congress is not interested in new consumer protection laws.
"Consumers need to take steps to protect themselves," said Philip A. Feigin, president of the securities group. "Going in with your eyes open is sometimes more powerful than regulation."
While every investor is affected by abusive practices, senior citizens are particularly at risk because they are often less sophisticated and more trusting than younger investors, Feigin said. Roughly 75% of the nation's 28 million senior citizens now rely on investments that are not federally insured to help maintain their standard of living.
Investors lose billions of dollars, coalition members complained, due to common legal practices such as using misleading titles to describe investment salespeople, selling uninsured investments at banks, providing poor disclosure, including risky derivative securities in investments touted as safe and providing confusing account statements.
Specifically, brokers are now commonly referred to as "investment advisers," "investment counselors" and "financial consultants," Feigin said. Often, they're simply salespeople who earn commissions on the financial products they sell. But the lofty titles give many investors the mistaken impression that the salesman sells advice rather than investments.
Meanwhile, 60 years of protection from the Federal Deposit Insurance Corp. has convinced many Americans of bank safety. But banks now commonly sell mutual funds, which provide no protection to the investor's principal.
Selling both federally insured and non-insured investments in the same branches is inherently confusing. But of greater concern is the sharing of confidential customer data with affiliates, such as when certificates of deposit mature and what rates they pay.
Banks shouldn't be able to share such information, and they should be more careful to clearly delineate where the line is drawn between the institution's securities division and its traditional role as a bank, Feigin said.
Former Sen. Howard Metzenbaum, who is currently chairman of the consumer organization, said investment disclosure documents fall short by burying important information in piles of drivel.
Disclosure is worthless when the pivotal facts are impossible to find, Metzenbaum said. Account statements, which are laden with jargon, abbreviations and fine print fall in the same category, he added.