Should a Financial Advisor Have Power of Attorney? An In-Depth Analysis

Selecting a financial advisor involves important decisions. One key consideration is whether to grant your advisor power of attorney, giving them legal authority to make decisions on your behalf. In this comprehensive 2500 word guide, we’ll examine if and when you should provide a financial advisor with power of attorney.

What is Power of Attorney?

Power of attorney is a legal document that designates someone as your agent and gives them certain powers to handle your finances and other affairs if you become incapacitated. Some key facts about power of attorney (POA):

• It provides your named agent authority to act in your stead for specified purposes.
• The most common types are financial POA and healthcare POA for medical decisions.
• It can be limited to specific actions or broad reaching over all matters.
• You can revoke POA privileges at any time as long as you have mental capacity.
• It expires upon your death.

Granting power of attorney is not a decision to take lightly. You should only entrust this authority to someone you have complete trust in.

Why Choose a Financial Advisor for POA?

There are several reasons why designating your financial advisor as power of attorney could make sense:

• Expertise – They have the knowledge to make prudent financial and investment choices on your behalf.
• Account access – POA allows them to readily conduct transactions in your accounts.
• Pre-existing relationship – You likely have confidence in an advisor you selected and have worked with already.
• Ongoing oversight – An advisor can continue monitoring your finances if you become incapacitated.

Your financial advisor may seem like an obvious POA choice given their qualifications. But simply having financial expertise does not automatically mean an advisor should be granted power of attorney status.

Key Considerations When Granting a Financial Advisor POA

If you are considering providing power of attorney to your financial advisor, several factors should guide your decision:

1. Type of Advisor

Not all financial advisors are created equal when it comes to suitability for POA status:

• Fiduciary advisors who are legally obligated to act in a client’s best interests make the safest POA choice. They are ethically bound to manage your finances properly.
• Brokers who only have to recommend “suitable” products but not necessarily the best ones pose more risks for POA conflicts.
• Fee-only advisors avoid commissions that could create POA conflicts versus fee-based advisors.

2. Length of Relationship

Ideally you should have a long-standing relationship with an advisor before granting them POA authority:

• A trusted advisor who has managed your finances for years makes more sense than someone you just hired. Longevity builds trust.
• New advisors are higher risk since you likely do not know them well enough yet to determine if they will abuse POA privileges.

3. Scope of Authority

With POA, you can limit powers only to areas like:

• Paying bills and managing household finances should you become incapacitated.
• Making investment portfolio and insurance policy decisions.
• Filing taxes on your behalf if disabled.

Grant narrow POA powers focused only on finances versus broad authority over healthcare, property, and other matters.

4. Safeguards and Oversight

Put protections in place:

• Require co-POA with family member or trusted legal advisor to prevent unilateral actions.
• Do regular account reviews even after granting POA to monitor for any concerning activity.
• Use revocable POA that you can rescind immediately if suspicions arise.

These precautions help minimize POA risks.

POA Risks and Downsides to Consider

While naming your financial advisor as POA has benefits, risks include:

Potential for financial abuse – This gives an advisor access to all your assets. Egregious cases have occurred where advisors misuse client POA for theft or fraud.

Biased decision making – Advisors may make choices that favor generating more fees versus your best interest.

Reluctance to relinquish control – Some advisors are hesitant to take on POA duties and liabilities.

Stresses advisor/client relationship – Granting POA puts your advisor in a decision-making rather than collaborative role.

These concerning factors warrant careful evaluation before providing your financial advisor power of attorney authority over your finances and livelihood.

Alternatives to Providing Financial Advisor POA

If you are uncomfortable granting full POA to your financial advisor, alternatives like the following give them some authority to keep managing your finances if you become disabled:

• Limited power of attorney (LPOA) – Only covers specific financial acts like paying bills or making investment trades.
• Springing POA – Only takes effect if you become mentally incapacitated. Does not provide any powers upfront.
• Co-trustee on accounts – Allows the advisor access without giving unilateral control.
• Successor trustee designation – Names the advisor as your successor trustee on a living trust if you can no longer serve.
• Representative payee assignment – For Social Security or VA benefits to be handled by the advisor if needed.

These narrower options authorize your financial advisor to continue managing aspects of your finances if necessary, without providing blanket power of attorney control.

Best Practices When Granting a Financial Advisor POA

If you decide it is prudent to designate your financial advisor as POA, following best practices helps minimize risks:

• Require co-POA with a family member or trusted legal advisor to prevent unilateral actions.
• Make POA limited or springing rather than broad and immediate.
• Use a revocable POA that you can revoke if concerns arise.
• Review accounts regularly for any suspicious transactions after granting POA.
• Select older fee-only fiduciary advisors who have served you for years.
• Document detailed instructions on how you want your finances handled if disabled.
• Hire an attorney to draft a customized POA document with proper protections.

Taking prudent precautions allows an appropriate level of advisor access and protection of your finances if you become disabled, without providing blanket powers.

Financial Advisor POA Checklist

When deciding if your financial advisor should have POA over any of your affairs, consider these key questions:

• How long have they managed your finances? Is the relationship firmly established?
• Is the advisor a fiduciary with legal duties to serve your interests first?
• Can POA authority be structured as limited or springing rather than broad?
• Does the POA document contain adequate restrictions and oversight provisions to prevent abuse?
• Have you discussed POA responsibilities thoroughly with the advisor? Do they understand and accept prudent limitations?
• Would designating co-POA with a family member or legal advisor provide checks and balances?
• Does the advisor demonstrate the ethics, care, and temperament that give you confidence in their handling of POA?
• Are you comfortable relying on this person to make major financial decisions on your behalf if needed?

Thoroughly examining these factors will guide your judgment on whether to entrust your financial advisor with power of attorney.

When to Revoke Financial Advisor POA Privileges

Even once granted POA, you should continue to monitor your advisor’s activities and performance. Immediately revoke POA if you observe any breaches of trust such as:

• Making egregiously bad investment decisions counter to your interests.
• Unapproved withdrawals or transfers from your accounts.
• Using your assets for anything besides your benefit.
• Sudden unreasonable spikes in fees charged.
• Failure to follow written instructions you provided.
• Refusing to provide transparency and information about their POA actions.

Any unethical or unauthorized usage of the POA granted should result in immediate revocation of the advisor’s authority.

Conclusions About Financial Advisor POA

Determining whether to grant your financial advisor power of attorney is not an easy yes/no decision. It requires thoughtful analysis of the advisor’s qualifications, your relationship history, implementing prudent limitations, and ongoing oversight if you do proceed. While naming a trusted fiduciary financial advisor as POA potentially makes sense in some situations, you must take great care to first put proper protections in place. This ensures your finances remain secure if you become unable to actively manage them yourself.

Should You Designate Your CPA as POA?

Beyond financial advisors, some people consider designating their CPA (certified public accountant) as power of attorney. There are pros and cons to this approach:

Potential benefits:

• CPAs have financial acumen and can adeptly handle taxes, accounting, and money management if you are incapacitated.
• If your CPA has prepared your taxes for years, they understand your financial picture well.
• You likely have an established relationship of trust with your CPA.
• They can ensure filings and paperwork continues uninterrupted if you cannot do it.

Risks and downsides:

• CPAs do not have the same specialized investment expertise as financial advisors.
• Your CPA may not want to take on the liability and responsibility of POA.
• They typically do not provide ongoing comprehensive financial planning and advice.
• CPAs are not regulated as fiduciaries, so they are not legally obligated to act in your best interest.

While naming your CPA as POA has some benefits, the risks and limitations noted above are important to weigh.

How to Choose a POA If Not Your Financial Advisor

If you decide against providing POA to your financial advisor, here are other options to consider:

• Attorney – Can act independently and provide legal expertise.
• Family member – Someone very close who you deeply trust.
• Trusted friend – Known for integrity and financial responsibility.
• Corporate trustee – A financial institution that serves as trustee for a fee.
• Multiple co-POAs – Shares responsibility across two or more POAs.

Think carefully about alternates who demonstrate care, wisdom, integrity, financial aptitude, and a willingness to serve diligently on your behalf if needed.

POA Tips for Financial Advisors

For financial advisors, before agreeing to be named as a client’s power of attorney, consider these best practices:

• Clearly communicate what POA duties you are willing and able to handle based on your expertise.
• Advise clients on prudent POA limitations and oversight provisions to protect them from abuse.
• Recommend co-POA arrangements and revocable POA privileges.
• Disclose any potential conflicts of interest if granted POA authority over a client.
• Maintain transparency regarding all POA actions taken, providing regular accountings.
• Act with extreme caution, ethics, and care when wielding client POA privileges.

Observing these guidelines helps advisors avoid POA misuse complaints and maintain trust.

Questions to Ask Before Granting POA

When weighing whether to designate your financial advisor as power of attorney, asking these questions helps guide your decision:

• What specific POA powers are advisable for this person to have? Should they be limited or full?
• Should POA authority be immediate or only take effect upon disability (springing)?
• Is co-POA with a family member or legal advisor needed for checks and balances?
• How long have I been working with this advisor? Is the relationship firmly established?
• Is the advisor a fee-only fiduciary for maximum trustworthiness?
• Does the advisor demonstrate the temperament and care needed to prudently handle POA?
• If POA is granted, what oversight processes will be in place to prevent abuse?
• Under what conditions should I revoke POA privileges if concerns arise?

Securing answers to these critical questions provides clarity on whether and how to appoint your financial advisor as power of attorney.

Conclusion: Thoughtful Evaluation Needed Before Granting Advisor POA

Providing power of attorney to your financial advisor has major implications. While potentially prudent in certain circumstances, it warrants very careful consideration of an advisor’s trustworthiness and qualifications. Implementing limitations and oversight provisions is crucial to prevent POA abuse. The decision should align with your specific situation and relationship with your advisor. By thoroughly examining all factors covered in this guide, you can make an informed decision on whether to grant POA privileges – and do so in a manner that protects your finances through any period where you cannot actively manage them yourself.

Consideration	Implications	Recommendations
Type of Advisor	Fiduciary advisors obligated to serve client interests make safest choice for POA. Brokers and fee-based advisors have more conflicts of interest.	Prefer fee-only fiduciary advisor for POA.
Length of Relationship	New advisors pose higher risk. Long-term relationships build trust.	Ideally have at least 5 year relationship before granting POA.
Scope of Authority	POA can be limited or broad.	Start with limited POA focused just on finances.
Safeguards	Protections like co-POA prevent abuse.	Require family member or legal advisor as co-POA for oversight.
POA Risks	Potential for abuse/biased decisions/fee conflicts.	Weigh risks carefully before proceeding.
Alternatives to Full POA	Limited POA, co-trustee status, etc. allow some access without full control.	Consider intermediate options short of blanket POA.
Best Practices	Prudent limitations, co-POA, revocable POA, close oversight.	Follow best practices if granting advisor POA.
Revoking POA	Revoke immediately if any unauthorized/unethical actions observed.	Don’t wait if concerns arise – revoke POA right away.
Conclusions	Granting advisor POA requires very thoughtful analysis and precautions.	Take great care before providing advisor POA. Implement prudent limitations.