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I recently worked with a well-intentioned, highly competent advisor who made the mistake of obtaining a full power of attorney for a client.
I was contacted by someone who said she was a friend of a widow. The widow had significant assets that were managed by an advisor who is a sole practitioner. Her portfolio had done quite well in the bull market.
The widow is in her late 70s. The other member of her financial team is her long-time accountant who is about the same age.
The friend has noticed cognitive decline in the widow. She is concerned about her ability to manage her portfolio and is worried that her financial team may be taking advantage of her.
She said the widow had read one of my books and believed I might have credibility with her. She asked if I would be willing to contact her and advise on what, if anything, should be done to deal with this issue.
I asked her if the widow would first authorize me to speak with the advisor and the accountant.
Shortly thereafter, I received copies of e-mails the widow sent to them introducing me and permitting them to speak with me.
My call with the advisor
The advisor didn’t wait for me to call. He reached out and asked if I would like to review her holdings and the performance of her account. I responded affirmatively and he sent me this information.
Everything appeared to be in good order. The portfolio was well-diversified. The asset allocation seemed appropriate. The funds had low management fees. It had performed very well.
In my subsequent call with the client, I asked her to access her account on the website of the custodian, which she did with difficulty. She confirmed the information in the reports sent to me by the advisor.
I called the advisor who was friendly and cooperative. I asked him to explain how he worked with this client and specifically what discretion he had over her accounts.
He told me he had a “full power of attorney” over them. He explained he required more than the typical limited power of attorney, because the client was “incapable of managing even the most mundane aspects of her financial affairs.”
I had no reason to believe he was not acting in her best interest.
My call with the client
When I spoke to the client, I advised her to replace her accountant (who was also a sole practitioner), to revoke the power of attorney she had given her advisor and to replace it with the more typical limited power of attorney.
Here’s why.
The client told me there was no one in her personal life she trusted to handle her financial affairs. She thought it was “wonderful” that the advisor “did everything” for her.
I told her I had no issue with either the advisor or the accountant and did not question their good intentions. However, I felt she was taking an unacceptable level of risk by giving what amounted to a blank check to her advisor, without any checks and balances in place.
I explained that it is highly unusual for an RIA to have these expansive powers over an account. Typically, they have a limited power of attorney, giving them the ability to (1) trade the client’s account; (2) receive statements, confirmations and other documents such as proxies related to the account; and (3) make withdrawals from the account solely for the purpose of deducting the agreed upon investment advisory fees.
Regulatory ramifications
When advisors have a full power of attorney, they may not realize the regulatory ramifications of doing so. They could be deemed to have custody of the account, which may require submitting audited statements to state regulators annually. They may also be subject to higher net worth requirements and the need to engage an independent accounting firm to verify the location and existence of the funds they hold.
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My recommendations
I recommended the client retain a large accounting firm that provided extensive bookkeeping services. This firm would have the resources to provide the high level of service she required and would also have the infrastructure to deal with the legal ramifications of having broad authority over her accounts.
There are other benefits to having a reputable accounting firm in place for clients who may be at the initial stages of cognitive impairment.
The firm will have internal checks and balances. It will also be well insured in the unlikely event of misconduct by its employees.
I also recommended that she ask the accounting firm to evaluate the performance of the advisor on an ongoing basis and advise her about keeping or replacing him.
While well-intentioned, the advisor made the situation worse by giving himself total control over the accounts of his client.
Dan trains executives and employees in the lessons based on the research on his latest book, Ask: How to Relate to Anyone. His online course, Ask: Increase Your Sales. Deepen Your Relationships, is currently available.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
