Trusted Contact Authorization vs. Financial Power of Attorney
Trusted Contact Authorization vs. Financial Power of Attorney
By John H. Robinson, Financial Planner (May 27, 2023)
It has come to our attention that our request for Trusted Contact forms has fostered some confusion among FPH clients over the purpose of the authorization and how it differs from the client’s financial power of attorney.
What is a Trusted Contact Authorization?
The trusted contact authorization form provides the name(s) and contact information of the person(s) whom the signor authorizes to provide information about his/her/their physical and mental well-being. It is usually a close friend or relative. The authorization has long been in use by the insurance industry as a means of helping policyholders avoid policy terminations due to non-payment of premiums in instances where the policyholder may be physically or mentally incapacitated.
More recently they have come into use in the investment industry as a tool to help protect seniors from elder fraud and also to help protect them from making potentially unsuitable investment decisions as a result of diminished mental capacity. It may also be used to help with wellness checks if the financial institution has been unable to reach the account holder for a period of time.
The Backstory of the Rise of Trusted Contact Authorization Forms
In 2018, FINRA, the regulatory agency for the brokerage industry issued customer account information rule 4512 which requires brokerage firms to ask their retail customers to provide the name and contact information of a trusted contact person.
Coincident with FINRA Rule 4512, in May 2018, Congress enacted the Senior Safe Act to enable and empower financial service representatives to step in to help prevent senior clients from becoming victims of elder fraud. Importantly, the act provides a degree of liability protection for financial institutions and their advisers who act in good faith with reasonable care to step in to help prevent suspected exploitation of seniors age 65 and above.
How is a Trusted Contact Authorization Different from a Financial Power of Attorney?
To be clear, the trusted contact authorization does not confer the right to information about account positions, or the value of accounts, nor does it give the contact person any authority to trade or withdraw funds. It only authorizes the firm to reach out to the trusted contact for a wellness check on the mental and physical condition of the client.
In contrast, the financial power of attorney typically grants another person besides the account holder broad power to make financial decisions on behalf of the client. Those decision-making powers typically include the ability to invest, withdraw, and spend on behalf of the client.
Summary
While the financial power of attorney is a critically important planning document that is usually drafted by an attorney at law along with other estate planning documents including health care directives, wills, and trusts, the trusted contact authorization serves a much narrower but still very important purpose. I encourage all financial planning clients to include a trusted contact authorization in their eMoney Vaults along with their other important planning documents (e.g., estate planning documents, beneficiary designations, asset registration documents).
Unfortunately, we have several examples of senior clients who have been targeted and victimized by scammers, including three so far 2023! The trusted contact form is one more tool that allows us to be proactive in preventing that from happening.
RELATED READING:
Consider Adding a Trusted Contact to Your Account (SEC.gov)
Do You Need a Trusted Contact to Help Protect You? (Forbes)
SEC, NASAA, and FINRA Issue Senior Safe Act Fact Sheet (SEC.gov)
How the Senior Safe Act Protects Your Finances (Kiplinger)
John H. Robinson is the owner/founder of Financial Planning Hawaii, Fee-Only Planning Hawaii, and Paraplanning Hawaii. He is also a co-founder of fintech software-maker Nest Egg Guru.
DISCLOSURES
Securities offered through J.W. Cole Financial, Inc. (JWC) member FINRA/SIPC. Advisory services offered through Financial Planning Hawaii and J.W. Cole Advisors, Inc. (JWCA). Financial Planning Hawaii and JWC/JWCA are unaffiliated entities.
Fee-only financial planning services are provided through Financial Planning Hawaii, Inc. DBA Fee-Only Planning Hawaii, a separate state of Hawaii Registered Investment Advisory firm. Financial Planning Hawaii does not take custody of client assets nor do its advisers take discretionary authority over client accounts.
The information contained herein is general in nature. Neither Financial Planning Hawaii nor J.W. Cole provides client-specific tax or legal advice. All readers should consult with their tax and/or legal advisors for such guidance in advance of making investment or financial planning decisions with tax or legal implications.
