The Importance of Power of Attorney in Financial Planning Discussions
A power of attorney (POA) is one of the most important yet dreaded documents your client may ever have to sign.
I have seen it all too often. Clients spend a lifetime building their nest eggs and handling their financial affairs with care and precision. The last thing they want to do is lose financial control at any point in their life.
However, the reality is that having documents signed where a trusted person could step in to make financial and medical decisions for your clients if they are unable, or unwilling, to do so will bring peace of mind for not only your client but you as their trusted advisor. Of course, we hope it will never be needed, but it may prove invaluable if required, as it will take all the guesswork out of decision-making.
As an advisor, I have always believed that the mutual respect we build with our clients is a powerful bond. Discussions around possible life events make it personal. We are in a privileged position to listen first and respond later. We all know how a power of attorney works, and a candid discussion addressing your client’s fears can go a long way.
I would suggest that no limitations are put in place so the attorney can act financially on their behalf. They can write cheques, buy or sell real estate, and even purchase consumer goods. However, their attorney does not own their money or property; they are simply acting on their behalf.
Their attorney cannot change their will, make a will, change a beneficiary on an insurance plan, or elect a new power of attorney. Those are decisions your client must make.
Clearly, this is an essential financial planning document and a powerful one that requires careful consideration. No one should ever be pressured into a decision if they are uncomfortable, but as an advisor, you are the person your client will turn to if they know you have their back.
Like any financial tool, there are pros and cons:
- The document makes it clear who is responsible for their money and property if they are unable to manage them on their own, even temporarily. Their attorney must manage their money and property responsibly and for your client’s benefit. If questioned, they may be required by law to account for their actions.
- The document can be as flexible or time-sensitive as they would like or as general or specific as they need.
- They can choose to appoint multiple attorneys and can request they make decisions in unison or highlight that they can act separately if one attorney is unavailable. They can also appoint an alternate or successive attorney. This may help to reduce the chance of fraudulent activity.
- There is a risk that if the wrong attorney is designated, they become vulnerable to financial abuse. The fear for many is the mismanagement of their money or property if the attorney they choose is untrustworthy. It can happen where an attorney makes decisions based on their best interest rather than the interests of the estate they manage.
- If their document lacks clarity, there is a risk that their finances could be managed in ways you do not simply agree with.
- If multiple attorneys are appointed, disagreements between them could cause problems or delays in the management of financial affairs.
The bottom line is this: Your clients should get independent legal advice to ensure their needs and expectations are outlined clearly, and advisors can play an important role here, too. This is a dynamic document; it can be changed or revoked at any time.
As your client ages, if their financial situation changes, if their family dynamics are altered and if they are able, they will need to review the plans they have put into place with you to ensure they still represent their wishes. It is their money, their life and, with your guidance, should be their decision on how it will be managed.
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~ Pattie Lovett-Reid
Chief Financial Commentator
- Posted by ajoshi
- On March 14, 2023
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