This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
A power of attorney (POA) is a legal document that grants a third party the authority to act on the account holder's behalf. In the context of a stock trading account, the POA allows a designated person, called the attorney-in-fact, to place trades, withdraw funds, or manage the account without the account holder's direct involvement. The POA is a powerful tool, and the POA carries significant risks if misused.
When a POA is useful
The first use case is the long-term absence. The account holder who travels for an extended period may want a trusted person to manage the account during the absence. The POA allows the designated person to place trades, and the POA allows the designated person to react to market events without waiting for the account holder's input.
The second use case is the incapacity. The account holder who suffers a medical event may want a family member to manage the account. The POA allows the family member to pay bills, to fund the account holder's expenses, and to rebalance the portfolio without going through a court process.
The third use case is the professional management. The account holder who hires a professional money manager may want the manager to have trading authority on the account. The POA allows the manager to place trades, and the POA allows the manager to execute the strategy without the account holder's direct involvement.
The fourth use case is the joint account. The account holder who has a joint account with a spouse or a partner may want to formalize the trading authority. The POA provides a clear documentation of the authority, and the POA reduces the risk of disputes.
The risks of a POA
The first risk is the misuse. The designated person has full control over the account, and the designated person can place trades, withdraw funds, or transfer the balance. The account holder who chooses the wrong person can lose the entire account, and the account holder may have limited recourse.
The second risk is the unauthorized trading. The designated person may trade in a way the account holder does not approve, and the account holder may not discover the trading until the damage is done. The account holder should monitor the account regularly, and the account holder should set up alerts for the trades and the withdrawals.
The third risk is the tax and legal exposure. The designated person's actions on the account are attributed to the account holder, and the account holder is responsible for the tax consequences. The account holder should keep a record of the POA, and the account holder should report the actions on the tax return.
The fourth risk is the broker's policies. Some brokers restrict the use of POAs, and some brokers require additional documentation. The account holder should check the broker's policy before granting the POA, and the account holder should provide the broker with the required documentation.
The documentation the broker requires
The first document is the POA form. The broker has a standard POA form, and the account holder completes the form with the designated person's details. The form specifies the scope of the authority, and the form is signed by the account holder and the designated person.
The second document is the identification. The broker requires identification for both the account holder and the designated person, and the identification includes a passport or a national ID and a proof of address. The broker uses the identification to verify the identity, and the broker uses the identification to comply with the anti-money-laundering rules.
The third document is the notarization. Some brokers require the POA to be notarized, and the notarization is a verification of the signatures by a notary public. The notarization adds a layer of protection, and the notarization reduces the risk of a forged POA.
The fourth document is the tax form. The broker may require a W-8BEN or a W-9 form for the designated person, depending on the designated person's tax residency. The tax form is used to determine the tax withholding on the account.
How to revoke a POA
The account holder can revoke the POA at any time, and the revocation should be in writing. The account holder should send the revocation to the broker, and the broker should acknowledge the revocation in writing. The revocation is effective on the date the broker receives the written notice, and the revocation cancels the designated person's authority to act on the account.
The account holder should also recover any access the designated person had to the account, and the account holder should change the password, the PIN, and the security questions. The account holder should also notify the bank and the custodian of the revocation.
Common questions about POAs
Can a POA be specific to certain actions? Yes. The account holder can limit the POA to specific actions, like placing trades but not withdrawing funds. The limited POA reduces the risk, and the limited POA is useful for account holders who want the designated person to have trading authority but not withdrawal authority.
Can a POA be granted to multiple people? Yes, the account holder can grant a POA to multiple people, and the account holder can specify whether the designated persons can act jointly or independently. The joint POA requires both designated persons to agree, and the independent POA allows each designated person to act alone.
What happens if the designated person dies? The POA is automatically revoked on the death of the designated person, and the account holder should notify the broker of the death. The account holder should also revoke the POA in writing, and the account holder should provide the broker with a death certificate.
Related resources
Where to start
If you are considering a POA, the most useful first step is to identify the specific need, the trusted person, and the scope of the authority. Our broker comparison lists the brokers that accept POAs and the documentation required, which together tell you what the broker requires before you grant the POA.