Top stocks to invest in – Power of Attorney: What Every Financial Adviser Should Know

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The most important financial document your clients can sign is a power of attorney (POA).

The POA can provide security and continuity to investments and other financial affairs and is thus a powerful and versatile instrument that everyone should have. Unfortunately, by the time your client may need one, it is often too late to begin the process to create it.

What Everyone Should Know

Why is a POA necessary? The document gives a designated agent the authority to make legal decisions and financial transactions on your client’s behalf in the event of incapacity or other limitation to act on their own behalf. It is not to be confused with a health care proxy, a document that only affects health care decisions.

Without a POA, no one is permitted to manage your client’s financial and legal affairs. Should your client become incapacitated, even if they are married or have adult children, family members will not be allowed to make important decisions without going through an extremely intrusive, time-consuming, and expensive guardianship proceeding, unless the authority has been granted via a POA.


How to Begin?

  1. State-Specific Law: Every state has its own POA document and laws governing execution. Do not simply download a form from the internet. Speak to a local certified attorney.
  2. Trustworthy Agent: As crucial as it is to be protected by a POA, it is equally critical that your client takes the utmost care in selecting an agent. The cardinal rule here is that the agent is someone your client trusts with their life since that is not too far from the truth. In the wrong hands, the powers granted to your client’s agent over their financial affairs present wide-ranging opportunities for abuse. So while financial acumen and attention to detail are important factors to consider, they pale in comparison to the key factor: trustworthiness. This usually persuades most people to name their spouse, adult children, or close family friend as an agent. An additional safeguard is to divide responsibilities among different agents, or to name monitors or to require agreement on certain transactions.

While your movie buff client may remember a film in which a character signed away all their rights with a POA, allowing the agent to pull the plug on life support, this scenario does not reflect reality and reflects a common misconception about POAs. Practically, POAs are:

  1. Personalized Documents: POAs are versatile instruments that can be tailored to individual needs. While many prefer the simple and maximalist approach of granting all authority — to a spouse, for example — certain powers can be limited and others expanded beyond the traditional scope, based on the circumstances.
  2. Broad Estate Planning: POAs are often created in the context of a broader personal estate planning strategy that includes a will and personal trust. However, a POA cannot grant an agent the authority to make health care decisions, which is why a health care proxy or a living will is also necessary.
  3. Effective Immediately: Requiring a judicial finding of incapacity in order to activate a POA can be time-consuming, burdensome, expensive, and contentious. As a result, most estate planning attorneys recommend a POA, which becomes effective immediately. This magnifies the need to select a trusted agent at the outset.

POAs and Your Clients

Investment advisers should ask their clients about the existence of a POA as a part of their regular intake and maintenance process. Your financial institution may have its own POA requirements — accepting the state-specific POA or preferring its own specific POA document. You should make sure your clients are aware of your company’s requirements. If no POA exists, encourage them to create one, ideally as part of a comprehensive estate plan, but at least with regard to continuing their investment plans.

One of the strengths of a POA is its versatility: It can be tailored to your client’s specific needs. While a standard POA may be suitable in most circumstances, a narrower POA solely addressing financial matters and investments can also be created if a client wants to designate a more financially savvy agent to handle these matters rather than their general agent.

Working with an Agent under a POA:

  1. Signs of Incapacity: If you suspect your client did not have the faculties to sign a POA in the first place, you should contact your firm’s legal department immediately. Possible options may include freezing the account, contacting the client directly, contacting any prior agent, or even providing an anonymous report to the Adult Protective Services (APS) office in your area.
  2. Signs of Abuse: Should a client already have a POA, you should keep an eye out for signs of financial abuse, including significant deviation from previous investment postures, change of account beneficiaries, excessively risky or short-term-focused outlooks, or a possible conflict of interest involving the agent. Sadly, such abuses are far too common.

Termination of the POA

An agent under a POA may only conduct business while the principal is alive. Accordingly, if you learn that your client has died or has revoked the POA, the agent will have no further standing to represent their interests. Only a court-appointed executor of the client’s estate or a direct beneficiary may then act on the account.

POAs are a lynchpin of careful planning. It is vital that your clients are protected by carefully tailored POAs, with the proper scope to meet their specific needs and, most importantly, a capable and trustworthy agent.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/Hailshadow


Katya Sverdlov, CFA, JD

Katya Sverdlov, CFA, Esq. holds a BS degree in economics from Cornell University. Prior to law school, Sverdlov spent 12 years working for several top Wall Street financial companies. Her experience includes senior positions in investment banking and securities industries, with a focus on mortgage-backed securities and collateralized debt obligations.
Sverdlov earned her Juris Doctor from the Brooklyn Law School, graduating Magna Cum Laude. She is admitted to practice in New York and New Jersey.
Sverdlov founded her law firm focusing on estate planning, probate and estate administration, Medicaid planning, elder law, and business succession matters. She is a member of the New York State Bar Association, New York City Bar Association, Brooklyn Bar Association, Trusts and Estates Law Section of New York State Bar Association, and the Elder Law Section of New York State Bar Association.

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