Power of Attorney and Your Investments: 10 Tips

It's never too early to consider how you want your financial affairs to be managed if something happens to you. One solution is to grant a power of attorney (POA) for your investment-account assets to your spouse, sibling, adult child, or close friend -- someone you trust to act wisely and in your best interest.

Many factors determine the type of POA you need, and whether it will hold up when needed. FINRA is issuing this alert to provide tips and information when considering a POA for your investment-account assets.

What is a power of attorney?A POA is 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. Many states require that POA documents be in writing, witnessed and notarized.

A POA can be important -- even essential -- to managing your financial affairs in the event you unexpectedly become unable to manage things on your own. For example, a health issue might land you in a hospital or rehabilitation center for a lengthy period, or you could become mentally incapacitated.

Planning for the future with a POA could minimize complications to achieving your financial goals, but it may feel like a daunting task. Depending on your circumstances, you may want to talk to an attorney who specializes in these types of arrangements.

Power of attorney tipsHere are 10 tips to help you understand, create, and prudently use a POA for your investment-account assets.

1. Don't let anyone pressure you into signing a POAAlways be cautious when giving someone control over your money, and never feel pressured or coerced into signing a POA, taking time to choose wisely. If you feel you are being pressured into signing a POA for your investment assets, take a break, and don't sign the document at that time.

Contact other professionals to get a second opinion, such as your lawyer or financial advisor, and discuss your objectives and concerns. For general information, and if you suspect that your financial professional may be pressuring you into a POA arrangement, you may also contact FINRA's Securities Helpline for Seniors -- HELPS--at (844) 574-3577.

Bear in mind that someone who has a fiduciary responsibility to you should, but might not always, act in your best interest. Unfortunately, some trusted individuals have used POAs for their own benefit rather than the good of the person who granted the POA, taking their assets, or otherwise acting against their interests. POA arrangements have been used as a vehicle for abuse by financial professionals, family members, and trustees, among others, to take advantage of clients, older parents, relatives, and friends.

2. Select an agent who understands your investment goals and objectivesThe most-important qualification for any POA, but especially for one with authority over your investment assets, is that your agent be someone you trust completely. The person to whom you give a POA for your investment accounts should also understand your short- and long-term investment goals and objectives, including how you plan to financially support yourself and your family in the future. You don't have to choose a financial expert, but your agent should have some basic knowledge about investing to be able to make decisions about your investment assets, and communicate effectively with your broker or advisor.

If you have a joint account with your spouse, but your spouse is not your agent, be sure to consider how a POA arrangement might impact the management of your account in the event that you become incapacitated.

3. Be specific about the authority you are grantingA POA should spell out the type of authority you are granting to your agent, what you still want to control, and how long the POA designation will last. The authority granted in a POA for your investments can include anything from limited trading authority in a brokerage account (trading only) to total control over decisions related to your investment portfolio and finances (trading and money/security movements).

Specify which accounts, and which asset types, are included in your POA. For example, you may choose to extend your agent's authority to your retirement-account assets so those assets may be rolled over to accounts of your spouse or children. If there is confusion about what your agent can do, your POA's validity may be questioned, and financial institutions may choose not to honor it.

You should use particular care regarding beneficiaries in your POA. Consider whether you will allow your agent to designate beneficiaries for you, or whether your agent may be named as a beneficiary to your investment-account assets, which could be important if one of your children serves as your agent. If you do not want your agent to have the authority to change beneficiary designations, be sure that the POA document excludes this authority.

To best ensure the integrity of your POA, have each page of the POA document notarized, and structure the document so that individual pages may not be easily replaced. For example, try not to end a section, paragraph, or sentence at the end of a page.

4. Make your POA durableThe type of POA you choose matters because it will determine when your agent's authority takes effect, and when it is rescinded. For instance, a POA that is not durable is automatically revoked if you become mentally incapacitated. On the other hand, a durable POA remains in effect even if you become incapacitated, and provides clarity if you are unexpectedly not in a position to manage your finances.

Without a durable POA, a court may have to appoint someone to act for you -- often referred to as a guardian or conservator -- which can cause confusion, and hinder your firm's ability to service your account. Once a court gets involved, you may not have a say in who is chosen to make decisions about your accounts. Having a durable POA -- and making sure the people in your life know about it -- could mitigate this risk.

If you don't want your POA to take effect immediately upon signing, you might create a springing POA, which is a type of durable POA that "springs" into effect upon the occurrence of a specific future act or circumstance, such as turning a certain age, or in the event that you become mentally incapacitated. In the latter case, this type of POA may not be ideal, as it typically involves a determination by a medical professional that you can no longer manage your affairs, a process that can take time, and may delay use of your POA.

5. Check the POA requirements for your stateThe laws governing POA vary by state. Therefore, it's important that you understand the applicable laws, both where you live, and where you hold investment accounts, before you set up your POA. Although most states will honor a valid POA from another state if it is in writing and notarized, check with your state to make sure.

For many states, you can find the state POA requirements and forms on the official state website. It's also advisable to contact an attorney licensed in your state to ensure that you understand the local laws so your POA meets legal standards.

6. Find out if your financial institution has its own POA formsWhen you are opening an investment account, or the next time you communicate with your financial professional, inquire about company-specific POA forms. Many financial institutions have their own POA forms that they will want you to sign. If you don't use the forms your company provides, they may ask you to provide additional information to establish the validity of your POA. Many states require that a POA be honored as long as it complies with applicable law, but you may have to get a court order to prove it.

Ask your financial institution what steps it takes to validate a POA. Some companies may ask when you open your account whether you have executed a durable POA. They may also ask whether you would like to designate a secondary or emergency contact for the account whom the company could contact if it cannot get in touch with you, or has concerns about your whereabouts or health.

7. Check in with your financial institution periodicallyContact your company to make sure unauthorized parties are not attempting to access your accounts, and ask about the company's policies to notify you if someone tries. You may want to request that your financial institution inform you if it receives a POA, guardianship, or other similar documents relating to your accounts.

Financial institutions have regulatory obligations regarding the privacy of your account information, so they tend to be protective of granting access to anyone but you. Companies are often particularly concerned about potential fraud and financial exploitation of clients who may be vulnerable, such as senior investors. This is why they typically will ask for an original copy of your POA with your signature.

If the original is not available, then you may be asked to provide an affidavit that the original is not available, and a certified copy of the original can be accepted. In this regard, it's a good practice to sign extra originals of your POA.

8. Know how to change or revoke your POAYou have the right to revoke or change your POA at any time and for any reason, as long as you have not become mentally incapacitated. If you decide to change or revoke your POA for your investment-account assets, in addition to your agent, you'll need to inform your broker, advisor, financial institutions and any other parties that may rely on it, as soon as possible. If your financial institutions do not receive notice of such changes, they may reasonably rely on a previously valid POA, and you can be bound by the actions of your agent.

The requirements on how to change a POA vary by state and the type of POA you set up. For example, in some states, a durable POA may be changed only by executing a new durable POA, or executing an amendment to the original POA.

In addition, states have different requirements when it comes to how a divorce impacts a POA arrangement if your spouse is named as your agent. Some states will automatically revoke a POA when a divorce is finalized, while others allow a POA to continue past the date of divorce if it contains language superseding such an event. If your agent is not your spouse, a divorce typically does not have any impact on your POA.

9. Understand the difference between POA, discretionary, and managed accountsThere are a few different ways to provide someone else with authority to manage your investment-account assets. A POA is one of them. You can also give someone authorized trading privileges, or provide discretionary authority in the account, which typically allows the investment of your money without consulting you about the price, amount or type of security, or the timing of the trades that are placed for your account. Some companies allow you to indicate who has discretionary authority over the account directly on the new account application, while others require separate documentation.

If you have a managed account, you will likely be asked to sign a limited POA that gives your financial professional authority to make decisions in the account on your behalf. This authority often is limited to trading decisions for your account, and does not grant the professional authority to make withdrawals from the account.

Ask your financial professional about any fees that may be involved with these arrangements. Managed-account forms may set out the fees or costs associated with a particular program, but some companies provide separate fee-disclosure forms.

10. Have a backup planConsider naming at least one alternate or successor agent in your POA who can step in if your agent is unwilling or unable to continue, or if you, your loved ones, or financial professional suspect fraudulent activity by your agent.

You could also consider naming a POA monitor -- someone who would make sure the POA is operating as you envisioned. Your POA agreement may require your agent to send the monitor copies of trade confirmations, account statements, and an accounting of any withdrawals.

You may also decide to include a provision that requires trusted family members or friends to sign off on major financial decisions in your investment accounts (such as a large withdrawal, change in beneficiaries, or a significant shift in your asset allocation), or those that do not clearly fall within the parameters of the risk profile you established with your broker or advisor.

While a POA can provide clarity on how your affairs will be managed while you're still living, it does not replace the need for a comprehensive estate plan that takes effect when you die. POA arrangements terminate upon your death or the death of your agent, so make sure you also have considered what will happen to your investment assets and other finances when you pass away. For more information, see FINRA's related investor alert: Plan for Transition: What You Should Know About the Transfer of Brokerage Account Assets on Death.

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