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It’s Not the Professional Title, But This Written Document That Creates a Fiduciary Relationship

It’s Not the Professional Title, But This Written Document That Creates a Fiduciary Relationship
May 08
02:05 2018

While many argue about how many financial professionals can dance on the head of the fiduciary pin, the answer to “Who is a fiduciary?” has always been there. It comes in the form of a written document called a “Limited Power of Attorney.” Registered Investment Advisers, at least those with the direct authority to trade client assets, can only do so under this legal agreement. Indeed, it can be argued that fiduciary “advice” cannot be given without the existence of a Limited Power of Attorney (“LPOA”). This makes the LPOA a very special instrument. Here’s why.

LPOA contracts are often used when delegating specific responsibilities to third parties. “A limited Power of Attorney document is used to appoint a fiduciary as an agent or attorney in fact for a principal to perform a specific set of duties,” says Chris Cooper a California Licensed Professional Fiduciary located in San Diego, California.

Ironically, their very power derives from the fact they have limited power. “As the name implies, a Limited Power of Attorney is a Power of Attorney that restricts the power of the agent to do certain acts,” says Marc Fitapelli, a partner at Fitapelli Kurta in New York City. “It is generally used when an individual needs an agent to perform a discrete task and does not want to give the agent more powers than are necessary. You should be aware of some of the lingo for powers of attorney. For example, the person granting the authority is often called the ‘Principal’ and the person accepting it is often called the ‘Agent’ or ‘Attorney-in-Fact.’”

“A Power of Attorney allows the Principal (the creator of the power of attorney) to appoint an Agent to act on the Principal’s behalf,” says Jill Scherff, a partner at Dinsmore & Shohl LLP in Cincinnati, Ohio. “The Power of Attorney may be a General Power of Attorney which grants the Agent the authority to do all acts that the Principal could do himself. Alternatively, a Principal may create a Limited Power of Attorney which specifically defines the scope of the powers granted to the Agent.”

Someone in the position to play to role of an Executor of an estate will necessarily requite full discretion over that estate. Other circumstances, however, may require a specialist to come in and complete one very narrowly defined task. “A Limited Power of Attorney is a contractual relationship where one party (a “Principal”) grants to another party (an “Agent”) certain powers to take actions on behalf of the Principal,” says Harry W. Drozdowski, Attorney at Anglin Flewelling Rasmussen Campbell & Trytten LLP in Pasadena, California. “The nature of the granted powers can vary wildly in type and scope and be limited to a specific set of circumstances (e.g., real property sale) or a fixed duration (e.g., one month). The purpose behind these Limited Powers of Attorney is to allow the Agent to take actions on behalf of the Principal that are necessary for the Principal’s goals or well-being if the Principal is unable or unavailable to take those actions. It is important to point out that these Limited Powers of Attorney are eponymously more limited than the common estate planning General Powers of Attorney. General Powers of Attorney grant the Agent a full suite of powers and authorities, essentially allowing the Agent to stand in the Principal’s stead for nearly all things. If a General Power of Attorney is the whole pizza pie, a Limited Power of Attorney is just a single slice.”

These documents have a long history and are a well-established legal tool used by many people under many different circumstances. Gerard F. Miles, Jr. a partner at Huesman, Jones and Miles, LLC in Hunt Valley, Maryland, says, “A Limited Power of Attorney is used when specific documents need to be signed by someone, who is unable, or too busy, to sign them personally.”

One advantage of a LPOA is that is allows the Principal to be in two places at once. “A Power of Attorney grants someone the authority to act on behalf of another person,” says Adam D. Citron, Senior Counsel at Davidoff Hutcher & Citron LLP in New York City. “A Limited Power of Attorney grants this authority only with respect to specific, enumerated acts. Granting limited power of attorney will often increase efficiency by allowing another person to conduct business for you. Additionally, it will allow you to save time; for example, if you provide limited power of attorney to your real estate attorney, you would not need to attend the closing of sale for real estate you are purchasing or selling, which could take a whole day. The attorney would have the limited authority to execute the necessary documents to effectuate the closing of sale.”

When this type of discretion authority is assumed by a third party (the Agent), that third party also legally assumes a fiduciary obligation to the Principal. “A Limited Power of Attorney allows a person (i.e. the Principal) to give a specific power of attorney in case the Principal becomes incapacitated and/or is unable to act,” says Oleg Cross an attorney at Cross Law APC in San Diego, California. “In addition, a Limited Power of Attorney may have a specific purpose event absent incapacity. For example, a Registered Investment Adviser may have a Limited Power of Attorney to buy securities or an accountant may have a limited/specific power of attorney to file your taxes or to speak to the IRS on your behalf. In general, a Limited Power of Attorney is a specific fiduciary relationship in which the Agent is given authority for a specific type of activity. The Agent has no authority to act on behalf of the Principal beyond the specific authority granted in the Limited Power of Attorney.”

Situations Where We Commonly See the Use of a Limited Power of Attorney

Since the need for an LPOA arises when transactions occur, we’re most likely to see them used in activities that require regular transactional activity. For example, Miles see them often in “real estate settlements and personal injury settlements. If a person is selling real estate, but that person lives far away from where the closing is scheduled to occur, it is common for them to appoint an attorney in fact for the limited purpose of signing settlement documents.”

Drozdowski offers this specific case where an LPOA is generally used: “One of the most common situations in which a Limited Power of Attorney is used is for the sale or acquisition of real estate. This use of the Limited Power of Attorney allows a seller that is unable or unavailable to delegate their powers and rights in the context of the sale to an Agent (typically an attorney). This Agent can then shepherd the sale through to completion without the need for the seller’s personal presence, attendance, or signatures. For many clients with long-term relationships with their attorneys, this Limited Power of Attorney is particularly attractive. Anyone that has bought or sold real property in the past few decades has no doubt dealt with the torrent of legal documents that must be reviewed, signed, or notarized. That torrent can take tremendous amounts of time and effort, and for the busy Principal, delegating those responsibilities to an Agent can be a tremendous timesaver. Or for a Principal that is on the move more often than not, perhaps out of the country, having an Agent on location to handle matters is far superior to traveling to an embassy or consulate in Belgium for a notary or reviewing documents on a redeye flight to Shanghai.”

There are other situations where an LPOA may be useful. “Limited Powers of Attorney are typically used for isolated transactions, such as the sale of a piece of real property, a car or boat, or stock in a particular company,” says Scherff. “A Limited Power of Attorney may also be used to authorize an agent to transfer assets to the principal’s revocable trust agreement in order to fund that trust. Alternatively, individuals who are deployed in the military may create a Power of Attorney that is general in nature regarding the agent’s powers but is limited in duration.”

Of course, as mentioned at the outset of this article, LPOAs have a very real relevance to RIAs. “We also see Limited Powers of Attorney for investment accounts if an account holder wants a third party to trade the account,” says Fitapelli.

Because of the many pitfalls investment professionals can face, their LPOAs are particularly precise when it comes to identifying limitations. “A very common use of this document is with investment advisers managing an account at a financial institution where is spells out very specific orders that the financial institution can accept from the Agent named in the LPOA document,” says Cooper.

How does a Limited Power of Attorney automatically create a fiduciary relationship between the third party and the client?

As you might surmise by now, the very existence of an LPOA creates a fiduciary relationship between the Agent (a.k.a. “Attorney in Fact”) and the Principal. “The Attorney in Fact is required to act in the best interest of the Principal,” says Miles. “Thus, there is a fiduciary duty created.”

As with trust law in general, individual states have long established their own laws regarding this. “Generally, if an Agent has accepted appointment under a Power of Attorney,” says Scherff, “the Agent owes the Principal certain fiduciary duties which are set forth by state law, such as but not limited to the duty of loyalty, to act in good faith, to act in the Principal’s best interests, to act with care, competence and diligence, and to not act in a manner that would create a conflict-of-interest that impairs the Agent’s ability to act impartially in the Principal’s best interest.”

These state-based laws, however, weren’t made solely for the purpose of LPOAs. They were for made for executors who held general Power of Attorneys. “A person who has been granted power of attorney effectively stands in the place of the person who granted this authority and must therefore act according to the interests of the grantor (or client),” says Citron. “That responsibility to act according to the interests of the grantor/client establishes a fiduciary relationship. In Montgomery v. Mosley (Aug. 24, 1990), Pike App. No. 448, for example, an Ohio Court of Appeals held that power of attorney constitutes a ‘form of agency [which] is always in a fiduciary relationship to his principal.’”

An Agent doesn’t have to book from Ohio to be subject to this fiduciary standard. Cooper says, “Probate laws in all 50 states spell out a fiduciary duty when someone is appointed as an Agent under a Power of Attorney document.”

Today, when an Agent enters into an LPOA contract, that Agent automatically accepts the role of fiduciary. “The document creates a special relationship between the Principal and the Agent for a specific purpose,” says Cross. “Once that relationship is created, any type the Agent acts in the scope of the authority granted to him by the LPOA, he acts as a fiduciary, and must place the interests of the Principal ahead of his own.”

“By operation of law, a Power of Attorney, limited or otherwise, always creates a fiduciary relationship between an Agent or Principal,” says Fitapelli. “In general, when one person is in a position of trust, the law implies a fiduciary relationship. The same concepts apply to trustees of trusts, administrators of estates, etc.”

It’s clear, then, that the presence of an LPOA offers proof that both parties agree and understand a fiduciary relationship has been established. “Under most jurisdictions, the Agent/Principal relationship automatically creates a fiduciary relationship between the Agent and the Principal,” says Drozdowski. “Similar to other roles where one-party places trust in another party to act for them (e.g., Trustees, Investment Advisers, Lawyers, etc.), the imposition of fiduciary duties serves the best interests of those placing trust by granting them a legal recourse against their fiduciaries that breach their duties.”

Can the Limited Power of Attorney Trump the Dual Registration Confusion?

Many have pointed out that, in allowing brokers to dual register as RIAs, the SEC unintentionally created confusion within the industry. Investors don’t know which hat their financial professional may be wearing. Perhaps, rather than titles, regulators, or registration status, we might want to rely on this one simple document – the Limited Power of Attorney – as the trigger for the establishment of a true fiduciary relationship. “There are dual-registered broker-dealers who are also RIAs (and could thus have both discretionary authority and an incentive to sell a proprietary product (i.e. for a commission),” says Cross. “And so, they would routinely hold LPOAs.”

Are LPOAs enough to end the confusion? Maybe not. But they do provide the legal basis for which one can substantiate the reality of a fiduciary relationship.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

5 Comments

  1. Phil Davidson
    Phil Davidson May 08, 10:44

    Hi Chris, great article. One question: what’s the significance of the photo? Thank you.

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author May 10, 13:26

    The eye is in the beholder, and it certainly catches your eye, which is the point of all photos. In this case, it’s that “double-take” look of surprise that they photo conveys. This mixes well with the point of the article.

  3. David Sterling
    David Sterling May 10, 15:56

    For your consideration …

    There is no such thing as an accidental fiduciary – Carosa. I am referencing your article which appears in Benefits Pro dated May 9th and could help but be struck by “balancing” of factors you engineer to assess “fiduciary” status or standing. TWO QUESTIONS:

    (1) Are you suggesting that that a “broker” could not assume a fiduciary role or standing by virtue of his/her representations and conduct? (2) In other words, what do you say to a “legally implied” determination of a fiduciary relationship and prescribed duties? David F. Sterling, Esq., Consultant

  4. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author May 11, 10:55

    David. Thanks for the question! I’m happy to reply here even though I think BenefitsPro would prefer you comment on their publication where the article originally appeared. That article was referring to a specific formal document (The LPOA) that automatically triggers a fiduciary relationship (the reasons for this are discussed in the FiduciaryNews.com article which is referenced). It sounds like what you’re referring to are informal “agreements” which may (or may not) also trigger a fiduciary relationship. As you are likely aware, those are likely determined by the specifics of the case and the relevant jurisdiction. In other words, without a legally enforceable document, can a broker become a fiduciary simply by telling the client, “I’m going to act like a fiduciary for you”? This is a very good question, one that I’m not sure there’s a clear answer on. In discussions with (now former) DOL officials on the (now former) Fiduciary Rule, I was told one of the reasons why they came up with the BIC concept was to formalize the fiduciary role so as to not rely on spoken promises, implied or not.

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