Ask adviser why he wants limited power of attorney

DOLLARS & SENSE And be sure you know how he will get paid

March 30, 2003|By Liz Pulliam Weston | Liz Pulliam Weston,SPECIAL TO THE SUN

I contacted a financial adviser and was considering moving my accounts to him. But he sent me a contract that includes a provision giving him limited power of attorney. The contract also requires me to promise not to make any decisions on my own.

Is this usual? His fees are 0.8 percent annually, based on the value of my portfolio.

A limited power of attorney would allow the adviser to make investment decisions without consulting you first. Although not unusual, this clause gives him a lot of power. You shouldn't sign it unless you're absolutely confident he has your best interests at heart.

That means you need to do some research. Financial planning expert Bob Veres suggests you start by scrutinizing how the adviser gets paid.

"The very first question I would ask is: 'Is there any way the adviser can benefit financially from transferring money from this fund to that one and back again?'" said Veres, who publishes Inside Information, a newsletter for financial planners.

If the adviser is paid by commission, in addition to the fees you're paying, he could have an incentive to churn the account. That doesn't necessarily mean he will, but you should be aware of the risk.

The adviser should be forthright about how he gets paid. Ask him directly, and double-check his answer by requesting his Form ADV, which should disclose all the ways he gets paid. You also can look in the contract, Veres said, for a clause requiring arbitration. That's a likely sign that the adviser is a broker who makes commissions from sales, Veres said.

You also should investigate whether the adviser has run afoul of securities laws or had problems with other clients. Check with the NASD (formerly the National Association of Securities Dealers) at www.nasdr.com as well as your state's securities and insurance regulators to see if he has a disciplinary history.

Also, stop by the county courthouse to see if he has been sued locally.

Finally, take a reality check. If this guy is promising sky-high returns, or even boasting that he consistently can beat the market, beware. Precious few financial advisers can best the major market indexes, and those who try often waste their clients' money with excessive trading.

If you're still unsure about whether to proceed with this adviser, see if he will work with you if you don't agree to hand over the reins. Most reputable financial advisers are willing to handle both types of investors: those who want to turn over day-to-day investing decisions and those who want to retain control.

If you're uncomfortable letting this adviser buy and sell investments without consulting you first, make that clear to him and don't sign anything that takes away your right to stay in charge.

As for not making decisions on your own, we'll assume you mean investing decisions. That provision is more unusual. Maybe this adviser got tired of creating investment plans for clients who undermined his work by making foolish decisions with money not under the adviser's command. Or maybe this adviser is a control freak.

It's worth asking him why he thinks the clause is necessary. If you don't agree, and he's unwilling to bend, you may need to look for another adviser.

You recently answered a question from someone who owed more on her car than it was worth and who was having trouble making payments.

I realize that bankruptcy options are not your favorite solution, but filing for Chapter 13 allows debtors to modify car loans by lowering the monthly payments and stretching them over three to five years.

I recognize that good credit is important. But reality sometimes dictates the use of federal bankruptcy laws, which do work and which preserve a person's assets while maintaining his or her dignity.

You're correct that a bankruptcy filing can allow a borrower to change the terms of an auto loan. In essence, the amount owed is reduced to the current fair market value of the car. The borrower can keep the car as long as she continues to make the new, lower payments.

Some borrowers use the threat of bankruptcy to negotiate with reluctant lenders. Some car loan companies might be willing to temporarily accept lower payments rather than risk having a bankruptcy judge permanently reduce the size of the loan. But filing for bankruptcy should be a last resort after other options have been tried.

Liz Pulliam Weston is a contributor to the Los Angeles Times, a Tribune Publishing newspaper.

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