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) grants a third party the authority to act on the account holder's behalf, and the POA can include the authority to place trades, to withdraw funds, or to manage the account. The POA is a useful tool in some scenarios, and the POA carries significant risks if the designated person is the wrong choice. The account holder should understand the risks before granting the POA, and the account holder should take steps to mitigate the risks.
The main risks
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 fifth risk is the relationship breakdown. The account holder and the designated person may have a falling out, and the designated person may use the POA to harm the account holder. The account holder should revoke the POA as soon as the relationship changes, and the account holder should monitor the account closely during the transition.
The sixth risk is the fraudulent use. The POA can be forged or stolen, and the forger or thief can use the POA to take over the account. The account holder should keep the POA in a safe place, and the account holder should revoke the POA as soon as the document is lost or stolen.
How to mitigate the risks
The first mitigation is to choose the right person. The designated person should be trustworthy, and the designated person should have the skills and the experience to manage the account. The account holder should discuss the POA with the designated person, and the account holder should make sure the designated person understands the responsibilities.
The second mitigation is to limit the scope. The POA can be limited 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.
The third mitigation is to set up alerts. The account holder should set up alerts for the trades, the withdrawals, and the balance changes. The alerts notify the account holder of any activity, and the alerts help the account holder catch any unauthorized activity early.
The fourth mitigation is to monitor the account. The account holder should check the account balance, the open positions, and the trade history on a regular basis. The monitoring helps the account holder catch any unauthorized activity, and the monitoring helps the account holder react quickly to any issue.
The fifth mitigation is to revoke the POA when the need ends. The account holder should revoke the POA as soon as the need ends, and the account holder should notify the broker in writing. The revocation is effective on the date the broker receives the written notice, and the revocation cancels the designated person's authority.
Common questions about POA risks
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.
What happens if the designated person is convicted of a crime? The broker may suspend the POA, and the broker may require additional documentation. The account holder should notify the broker of the conviction, and the account holder should consider revoking the POA.
Can a POA be challenged in court? Yes, the POA can be challenged in court if the account holder or another party believes the POA was obtained by fraud or undue influence. The challenge can result in the POA being revoked, and the challenge can result in damages being awarded.
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.