The aging of the baby boom generation looms as a windfall for con artists who have become increasingly skillful at duping people out of their life savings, securities regulators warned Monday.
Moreover, such scams have proved especially effective against people with above-average levels of financial sophistication, according to a new report.
That finding raises questions about the sort of message to consumers that would be most useful in combating such schemes.
"Protecting seniors from investment scams is one of the most important issues of our time," Securities and Exchange Commission Chairman Christopher Cox said at the agency's Seniors Summit, an event held to call attention to fraud threats.
The issue will be further complicated, he said, by the fact that future retirees may be less conservative in their approach to investing than older people have been in the past. Greater longevity and rising healthcare costs, for example, will increase the cost of retirement, potentially making people more susceptible to sales pitches that hold out the promise of boosting wealth.
"While they're living longer, people's retirement plans haven't taken that into account," Cox said. The retirement of 76 million baby boomers -- the oldest of whom are now 60 -- and the financial pressures many of the boomers will face could make for a "perfect storm" for investment fraud, he said.
People over 60 represent 30% of financial fraud victims, the group Consumer Action estimates. And the mountain of wealth controlled by that age group is expected to balloon. Baby boomers now have $8.5 trillion in investable assets, a figure that could swell with trillions of dollars in projected inheritances.
At Monday's summit, financial regulators listed a number of common schemes that aim to defraud older investors, and also focused on the psychological tricks and other forms of manipulation that con artists use to persuade their victims.
In one typical fraud, criminals pose as charitable organizations offering monthly annuity payments to investors who surrender their savings.
In some cases, pitches may center on products that are legal but are being sold in a misleading way, regulators said. That could include investments that tie up older peoples' cash for many years, putting them at risk of heavy redemption charges if they try to exit early.
Fraud perpetrators sometimes attract seniors at free-lunch style events in local restaurants and hotels, a practice the SEC has said it is scrutinizing.
Law enforcement faces an unlikely challenge in fighting fraud against seniors, according to a study included in a report issued at the summit: In a finding that surprised researchers and regulators, the study showed that fraud victims scored higher on tests of financial literacy than people who had not been victims.
Counter to some stereotypes, victims also were more likely than non-victims to be male and college-educated, according to the report, sponsored by the Investor Education Foundation of the NASD, the brokerage industry regulator formerly known as the National Assn. of Securities Dealers.
The study of investors was based on focus groups and telephone interviews with people who had been defrauded and with a randomly selected group of non-victims.
Anthony Pratkanis, a professor at UC Santa Cruz and one of the NASD report's authors, said the better-educated paid a price for their apparent knowledge, which made them less inclined to consult with accountants and financial planners before sinking money into scams.
"That little bit of knowledge, that feeling of control, becomes dangerous in this situation," he said.
Although investor education has traditionally been touted as an antidote to fraud, regulators and consumer advocates at the summit said the finding that people with some financial knowledge were vulnerable might dictate a new approach to such programs.
Classic financial education -- say, teaching the difference between a stock and a bond -- may not be enough, regulators said.
"I think we're really redefining what financial literacy is," said Chris Hansen, an executive officer at AARP. "We're really saying it has to be far broader than people think of it."
The NASD report also detailed the range of psychological and other techniques financial hustlers employ to exploit victims.
Some are as basic as using phony credentials to establish authority. Researchers, who reviewed 128 transcripts of phone calls by fraud perpetrators to undercover investigators posing as older investors, found examples of crooks pretending to be lawyers, chief executives, the Royal Canadian Mounted Police and the attorney general of Ohio.
Investment fraud pitches, the NASD report said, tend to involve lengthy and multiple conversations between the con artist and the victim, and "profiling" -- wherein the perpetrator attempts to learn as much as possible about the victim's life and customizes the sales pitch accordingly.
"One con criminal told us he would spend the first 15 minutes of each telephone call praying with one particular victim. Why? Because he had determined in previous conversations that this person was deeply religious and depended on God for all of her decisions," the report said.
The use of profiling "suggests the importance of investors limiting the amount of personal information they offer to salespeople over the phone or in person," according to the report.
But the most common sales pitch of a hustler, regulators said, centered on so-called phantom fixation -- a tactic that involves dangling promises of great returns, such as telling victims that income from a gas well is a sure bet.
"Our message is pretty simple," Anthony Lewis, chief deputy commissioner of the California Department of Corporations, said at the summit: "If it sounds too good to be true, it is."
(BEGIN TEXT OF INFOBOX)
Here are the most common investment scam techniques used by financial fraud perpetrators, according to a report by the NASD Investor Education Foundation. They are listed in the order of the frequency of their appearances in undercover telephone transcripts involving financial hustlers and their targets.
* Phantom fixation: Offering the prospect of wealth and riches.
* Scarcity: Making an investment offer seem rare to increase its appeal.
* Source credibility: The con artist claims to be from a known business or other legitimate entity.
* Comparison: Juxtaposing the offered price of the investment with a higher-priced example.
* Friendship: Appearing to be the victim's friend.
* Commitment: The perpetrator tries to get the victim to make a commitment early on, then uses that promise against him later.
* Social consensus: The con man makes it seem like everyone is buying his investment.
* Reciprocity: The con artist will do a small favor for the victim, thus putting pressure on the victim to reciprocate.
* Landscaping: The con man structures the interaction between himself and the victim so that all roads lead to where the perpetrator wants the victim to go.
Source: Times research