When someone other than the client wants to instruct you on the client account, you need written authorization — usually in the form of a power of attorney (POA). Just taking the person’s word for it can lead to litigation and regulatory proceedings against you with substantial damages and penalties.
As an example, here is a true scenario for which the names have been changed: An advisor receives a call from Mrs. Smith’s husband advising that Mrs. Smith, the client, is very ill and he has the POA over her account. Mr. Smith instructs the advisor to redeem funds from time to time and over a period of time. The advisor trusts Mr. Smith and follows his instructions.
Several months later, Mrs. Smith’s sister contacts the advisor to tell him that Mrs. Smith is ill and that she has the POA, a copy of which is produced. The advisor does not report his mistake to his dealer.
Mrs. Smith’s sister reviews the account transactions and asks about $40,000 of redemptions. The advisor tells her that instructions came from Mr. Smith for the redemptions. The sister tells the advisor that Mr. and Mrs. Smith have separated and Mr. Smith cannot be trusted. The sister reports the infractions to the dealer.
Fortunately, when the dealer audited the advisor, there were no other infractions discovered; so, he was not terminated. However, the advisor was placed on strict supervision and was compelled to reimburse Mrs. Smith for the redemptions. The dealer is compelled to self-report to the overseeing regulator; the regulator investigated and a settlement was agreed upon.
The total cost to the advisor was $67,000, of which $12,000 were in costs the dealer charged the advisor for the strict supervision now required; the $40,000 reimbursed to Mrs. Smith; and the $15,000 for the regulatory penalty. Added to all these costs is the reputational damage associated with the Notice of Settlement Hearing and ultimate publicity of the advisor’s name and infraction, which was a significant blow, particularly in this case, in which the advisor was a veteran in the industry with an otherwise squeaky clean record and reputation.
So, what are the lessons that can be learned from this scenario that will likely become more and more prevalent as the average age of the population increases?
- Never trust the person who asserts that he or she has a POA. Insist on receiving the documentation and review it carefully to ensure the POA is consistent with instructions received from the person so appointed, and if it is limited in any manner whatsoever.
- If you need help to interpret the powers set out in the POA document, send it to your compliance officer or supervisor so they can direct you. Is there a term that provides the client must be incapacitated? If so, a doctor’s letter is required to confirm incapacity.
- Pick up the telephone and call the client to find out how she is. Is she really sick? Does she want you to rely on the POA? Is the person who has presented himself or herself to you — in this case, the client’s husband — the one she trusts to instruct you?
- Discuss with all clients on a regular basis who they trust and get these instructions in writing.
- If you discover any infractions that you may have committed, don’t wait to self-report to your dealer (direct supervisor and compliance officer). It will go a long way to be transparent. We all make mistakes, but we can make it worse if we don’t come clean quickly. Hiding a client complaint, by neglecting to bring it to the attention of your supervisor, is an infraction, even if you deem the complaint to be unmeritorious.
So, if someone appears and suggests he or she will be giving you instructions, instead of the client, be weary and careful. Don’t take this person’s word for it as it might come back to haunt you in the form of substantial costs in both money and reputation.