Help Safeguard Your Investments: Understanding Trusted Contacts, Authorized Persons, and Powers of Attorney

Roughly a decade ago, the Financial Industry Regulatory Authority (FINRA) and the U.S. Securities and Exchange Commission (SEC) identified a critical gap in protecting elderly investors from financial fraud and abuse. Brokerage firms were limited in their ability to intervene, as they couldn't legally contact anyone about a client's account without explicit authorization. Disclosing even the existence of a client's assets at the firm could violate privacy rules.

To address this, FINRA introduced Rule 4512, effective February 5, 2018. This rule requires brokerage firms to make reasonable efforts to obtain a trusted contact person's name and contact information when opening new retail accounts or updating existing ones. This measure is crucial for safeguarding investors, especially seniors, from financial exploitation and fraud, without granting the trusted contact control over the account.

How Do These Roles Differ?

While a trusted contact, an authorized person, and a power of attorney (POA) all play a role in managing your financial affairs, their powers and responsibilities differ significantly. It's important to remember that policies can vary among financial institutions, so always consult your brokerage firm for specific details.

Trusted Contact

A trusted contact is someone your financial company can contact if they suspect you are a victim of a scam, financial abuse, or are experiencing diminished capacity. Unlike an authorized person or a POA, a trusted contact has no authority or access to your account.

When contacting your trusted person, a firm representative can confirm that you have assets with them. However, they typically provide minimal account information, such as account balances or registrations, to maintain your privacy. The primary purpose of this contact is to discreetly express concerns and potentially enlist their help in protecting you.

Authorized Person

An authorized person is granted specific levels of access to your account by you, the account holder. Most firms offer different tiers of authorization:

Inquiry Access: This level generally allows the authorized person to:

• View your accounts online through their own login.

• Make inquiries about your account, such as transactions and current balances.

• Access tax forms and related information.

Limited Authority: This level includes all the access of Inquiry Access, plus the ability to:

• Place trades.

• Incur margin debt if the account is approved for margin.

• Deposit checks into the account.

Full Authority: This is the most comprehensive level of authorization, encompassing all the powers of Limited Authority, in addition to the ability to:

• Make withdrawals or transfer funds.

• Initiate IRA rollovers, recharacterizations, and Roth IRA conversions.

• Make federal, state, local, or foreign tax elections on your behalf.

Power of Attorney (POA)

While the authorizations above are typically established using forms provided by the brokerage company, a Power of Attorney (POA) is usually a legal document drafted by an attorney. This document is then submitted to your brokerage firm, often accompanied by a company-specific form.

It's common for firms to have specific language requirements for POAs. To avoid potential delays or rejections, it's highly advisable to contact your brokerage firm beforehand and ask if they have a document outlining their preferred POA language. You should also inquire about their policy on the validity period of a POA after it's been dated. Many companies accept a POA for up to 90 days after its creation, after which you might need a statement from an attorney confirming its continued validity.

A POA typically grants all the authority associated with "Full Authority" access, and may also allow the designated agent to:

• Change beneficiaries on your accounts.

• Update your address and make other account maintenance changes.

Why Granting Authority Matters

These authorizations aren't just for elderly clients. Unexpected situations, such as illness or incapacitation, can affect anyone, regardless of age. It's crucial to consider granting someone, at a minimum your spouse, one of these authorities. Many couples are surprised to discover they cannot act on each other's Individual Retirement Accounts (IRAs) until an unfortunate event occurs.

Regularly reviewing your accounts to ensure appropriate authorizations are in place and kept current is a sound financial practice that can prevent significant headaches down the line.

Do you have questions about which type of authorization is right for your financial situation? Schedule a consultation today.

Disclaimer:

Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor. Stratos Wealth Advisors and Synergy Wealth Management are separate entities. 

Stratos or Synergy Wealth Management does not provide tax or legal services. Please consult legal or tax professionals for specific information regarding your individual situation.