Investment advisers looking to manage client stock portfolios can register with the appropriate authorities, such as the U.S. Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA). They can also do so by opening their own business. While both options require a power-of-attorney authorization from each client, registered advisers must meet a series of stringent requirements, such as passing a Series 7 exam with sponsorship from an established firm, and fulfilling ongoing educational requirements. However, uncertified stock managers have a difficult time attracting clients beyond family and friends.
Money managers advise their clients on investment options consistent with risk tolerance. Stock advisers must keep current with market news and the financial exchanges, such as the New York Stock Exchange and NASDAQ, and must serve their clients with integrity. A power-of-attorney agreement lists the scope of specific duties and powers, which can include the ability to make buy and sell decisions, execute stock trades, receive statements and decide where to place uninvested cash.
As part of a prudent portfolio management strategy, investors will decide whether they or their advisers have decision-making ability over stock trading accounts. If that control rests with an adviser, the client must provide written authorization granting discretionary authority, which is often part of the power-of-attorney document. According to FINRA, discretionary authority allows another person to "invest your money without consulting you about the price, amount or type of security or the timing of the trades that are placed for your account."
The SEC classifies registered financial institutions as qualified custodians that are authorized to hold client assets, provided that those resources are kept separate from the firms' own cash and stock holdings. According to the SEC, many registered stock advisers are also qualified custodians and "may maintain their own clients' funds and securities, subject to the account statement requirements ... and custody rules imposed by the regulators of the advisers' custodial functions." A power-of-attorney authorization granted to account custodians can also include check-writing privileges and the authority to deduct fees directly from clients' accounts.
General, Limited and Durable Power of Attorney
Individuals can grant their advisers a general power of attorney that gives them authorization to conduct all business and personal matters, including the ability to trade stocks and manage investment portfolios. A limited power of attorney confines the authorization to specified functions and decisions. A durable power of attorney remains in force if the person granting this authority becomes ill or incompetent and is no longer able to make financial and other decisions.
- Financial Industry Regulatory Authority: What to Expect When You Open a Brokerage Account
- U.S. Securities and Exchange Commission: Custody of Funds or Securities of Clients by Investment Advisers
- South Dakota Office of the Attorney General: Durable Power of Attorney
- Office of the Minnesota Attorney General: Power of Attorney