By: Alexandra Hughes, Spring 2016 Clinic GRA
On March 23, 2016, FINRA issued a FINRA Investor Alert: Power of Attorney and Your Investments—10 Tips. Managing financial affairs and investment accounts is often a battle of competing interests (present v. future needs) for investors. Although it may be easier for an investor to manage his financial affairs taking a “one day at a time” approach, such thinking is too short sighted. It is equally important for investors to plan for their future needs, especially when unfortunate life events, such as sickness and other health issues, are inevitable, and may leave an investor unable to manage his investment accounts and financial affairs.
POA: What is it?
Power of Attorney (POA) is one way an investor can plan for the future. FINRA’s investor alert defines POA as “a legal document you sign to grant someone you trust with authority to make decisions on your behalf. Based on the authority you grant, this attorney-in-fact, or agent, has the legal right to make the decisions you would make if you were able.”
10 Tips for POA: What Every Investor Should Know
The following are 10 tips FINRA thinks every investor should know about POA:
- Don’t Sign a POA Under Pressure. A POA is a powerful document that gives another individual control over the investor’s investment accounts, and thus finances. FINRA advises the investor to never feel pressured or coerced into signing such a document and to think carefully about choosing an individual to be an agent under a POA. Contacting a legal or financial professional for a second opinion, as well as calling FINRA’s Securities Helpline for Seniors, may also be helpful.
- Select an Agent Who Understands Your Investment Goals and Objectives. When the investor selects an agent under a POA, the investor is enabling the agent to control the investor’s investment accounts. Thus, the agent chosen should have a good understanding of the investor’s present and future investment objectives, so that the agent can act in the best interests of the investor and act as if the investor was able to act for themselves. An agent does not have to be a financial professional. Further, the investor should consider how a POA arrangement may impact a joint account.
- Specify What Authority the POA Grants the Selected Agent. The authority granted under a POA should be specific. POA can be limited to “trading authority in a brokerage account (trading only) to total control… (trading and money/security movements).” Further, the POA should specify which accounts and assets the agent has control over and if the agent can designate beneficiaries (individual who receives investment account assets upon investor’s death).
- Making the POA Durable. An investor should understand the difference between a regular and durable POA. A regular POA is revoked when the investor becomes mentally incapacitated and a court may appoint a guardian or conservator to act for the investor, leaving the investor little say in how the investment accounts get managed. A durable POA allows the agent to remain in control of the investor’s investment accounts if the investor becomes incapacitated. FINRA suggests a durable POA. A durable POA doesn’t have to take effect right away—a “springing” durable POA doesn’t take effect until a certain condition (e.g., age or mental incapacitation) occurs.
- Check the POA Requirements for Your State. FINRA advises investors interested in creating a POA to check the requirements of both the state where the investor lives and the state where the investor holds the investment accounts. Failure to comply with state requirements can render the POA invalid. FINRA suggests visiting an official state website and talking with a licensed attorney.
- Find Out if Your Financial Institution Has Its Own POA Forms. FINRA also advises investors interested in creating a POA to talk with their financial institution, since most firms do have firm-specific POA forms that the investor may need to sign.
- Check with Your Financial Institution Periodically. Investors should always know who is attempting to access their account and whether any POA documents have been filed with their firm regarding their investment accounts. Although financial institutions are protective of any unauthorized access to investment accounts, it is still important for the investor to check in with his financial institution periodically to address any concerns about access. The investor will generally need to send his financial institution the original, or a copy of, the POA.
- Know How to Change or Revoke a POA. Knowing how to revoke or change a POA is just as important as knowing how to create one. FINRA suggests the investor wishing to revoke or change his POA to inform the agent, broker, adviser, financial institution, and any other parties which may have relied on the agent’s authority as authorized by the POA. Again, the requirements for revoking or changing a POA are set by state and an investor may want to consult a legal professional for help.
- Understand the Difference Between POA, Discretionary and Managed Accounts. A POA is different from either a discretionary or managed account. A discretionary account allows a financial professional to invest an investor’s money without prior consultation with the investor about the price, security type, or timing of trades for the account. A managed account allows a financial professional to make limited trading decisions for the account. FINRA advises investors to ask about fees associated with these account types.
- Have a Backup Plan. Because unexpected things always happen, FINRA advises the investor to name at least one alternative or successor agent in a POA (an individual who can replace the agent if the agent is unwilling or unable to meet their obligations under the POA). An investor may also want to “consider naming a POA monitor—someone who would make sure the POA is operating as [the investor] envisioned.”