This is the second in a two-part series on the steps advisors and their dealers can take to protect senior clients and meet the new standards that focus on the vulnerability of senior clients. This column will drill down on the power of attorney (POA), one of the most challenging issues facing advisors who serve senior clients. The first column explored what you need to start doing to meet the standards.
As the average age of the population increases, it’s becoming more commonplace for advisors to take instructions from people other than the client pursuant to a signed power of attorney (POA) document. Navigating some of the complexities associated with a POA has become a huge problem for advisors and dealers as this presents practical and legal issues fraught with challenges, and there don’t appear to be protocols established by our principles-based approach to regulation to help them navigate this issue. As a result, advisors and their dealers need to establish their own protocols to address the everyday issues that present themselves.
Here’s an example: Mable, 82, introduces you, the advisor, to her daughter Sandy, 55. As Mable’s husband died, Sandy attends most meetings at your office with her mother. Mable seems clear minded and healthy to you and instructs you on decisions regarding her account, redeeming investments only as required to support her lifestyle.
About five years later, Sandy calls you after her mother’s 87th birthday, saying Mable has asked Sandy to make all future decisions in respect to her mother’s assets, including money in bank accounts and the assets held in her investment accounts. So, what do you, as the advisor, need to do?
> 1. First, ask for the POA, regardless of the history of your relationship with Sandy and that you have seen that Mable trusts her daughter. Explain that you are unable to take instructions from Sandy without the POA.
> 2. When the POA is delivered to you, make sure you understand the terms; read it carefully. Also, review the POA to confirm that it is indeed signed by the client and witnessed by someone other than the person appointed as POA, not Sandy. What authority is given? What are the circumstances in which the authority is given? Must the client be unable to take care of his or her own property? Is there a need for a doctor’s letter opining on the client’s capacity before the advisor can take instructions from the person appointed? Your dealer’s lawyer should see the document and advise you accordingly.
> 3. Assuming the POA is in tact and your dealer’s lawyer gave you the green light to proceed to take instructions from Sandy, you need to ensure that the decisions made for the account are in keeping with Mable’s risk tolerance. If the risk tolerance was low or medium before, then it should not be increased to high. The money must be consistently invested as it was before unless there is a reduction in the risk tolerance. Although it might be tempting or confusing, never invest in accordance with the risk tolerance of the person from whom instructions are provided, thus forgetting that the money belongs to Mable and must be invested according to her previous risk profile, not Sandy’s risk profile.
> 4. Be weary of redemptions and/or transfers. If the redemptions are consistent with the client’s previous needs, then that’s fine; but if there’s an out of the ordinary request for a larger redemption, questions need to be asked: what is the money for? Does it make sense?
> 5. If the POA is also the estate’s beneficiary, he or she may believe that the money already belongs to him or her; at which point, the POA may then want to begin paying off his or her own mortgage, for example. If Mable didn’t choose to pay off Sandy’s mortgage before Sandy had control over the account, then that should not be done now either. Sandy must wait until Mable passes away to get the benefits of the estate — and after Mable’s last will and testament is read to confirm that Sandy is to inherit the account, before that money is given to Sandy for her own needs.
These are just some basic steps that will reduce your risk if followed. However, if there are facts or issues that fall outside the norm, ensure you consult legal or compliance before you execute on any instructions.
Be cautious and always ensure all instructions are consistent with your client’s needs and values and not the needs and values of the person appointed under the POA. The legal advice obtained before there’s a problem is significantly less expensive than the cost of litigation or regulatory defence associated with allegations of unsuitable/unauthorized trading by other beneficiaries, such as Sandy’s brother Morton, whom you didn’t meet until after Mable’s demise.
Power of attorney: What advisors need to know