What it means
Many investors want help with trading decisions but do not want to give anyone access to their cash. This arrangement splits the two powers: the authorised person can trade, while the money stays under the owner's control.
It is typically granted to a financial adviser, portfolio manager or trusted family member through a form filed with the broker. The form names the person and spells out what they may do, such as buy and sell securities, and states that they may not move funds out.
Most brokers will also check the identity of the person named and keep a signed copy on file. The main risk is not theft but poor judgement.
An agent who trades too often, uses excessive borrowing or concentrates the account in a few positions can cause large losses without ever withdrawing a cent, and some arrangements also generate commissions that reward activity. The authorisation sits between full discretion, where the manager makes every decision, and a non-discretionary account, where the owner approves each trade.
Brokers keep records of who holds the authority, and the owner can cancel it by notifying the broker in writing. Owners should still read statements regularly and confirm trade confirmations match what they expect.
Regulators generally expect brokers to supervise accounts with third-party trading authority, but the owner remains the first line of defence, because the owner is the only person who knows what was actually agreed. A sensible owner also writes down the limits that the paperwork cannot express, such as a maximum size for any single holding, a ban on borrowing against the account, and a rule on how often trades may be made.
Putting those limits in a short letter to the adviser creates a record that can be checked later.
In practice
Real-world examples.
Example
A busy surgeon gives her adviser limited trading authority over a $400,000 account. The adviser rebalances the portfolio each quarter, but when the surgeon needs $30,000 for a house deposit she has to place the withdrawal request herself. The adviser has no way to move that cash, and the broker would reject any request from him.
Example
A founder sells his company and asks a private bank to manage the proceeds. The bank receives trading authority only, and all payments out of the account still need his signature. He reviews the monthly statement to check that activity matches the agreed strategy.
Example
An elderly parent grants an adult daughter limited trading authority so she can sell holdings if markets fall. The daughter cannot transfer assets to her own account or pay bills from it. The broker sends copies of every confirmation to the parent as well, so the parent can see each order the day it is placed.
Case study
Seen in the real world.
Greywell Advisory is an illustrative, fictional firm that manages accounts for clients under limited trading authorisations. One client, a retired engineer with $600,000 in his account, wanted advice but feared losing control of the money.
The adviser explained that the paperwork allowed trades only, with withdrawals and transfers reserved to the client. The client also asked for a rule that no single holding could exceed 15% of the account, and the adviser agreed in writing.
Over the next two years the adviser rebalanced the account quarterly, and each month the broker sent the client a statement listing every trade. The client noticed that one quarter's trading had been heavier than agreed and raised it, and the adviser reduced the activity. Two years later the client left the firm and cancelled the authority with a single letter to his broker. In this illustrative story the separation of powers meant the adviser could be replaced without any money having to be recovered.
Watch out
Common mistakes.
- Believing the authority makes trading risk-free, when the agent can still lose money through poor or excessive trading.
- Skipping statements and trade confirmations because the agent is trusted, which delays the discovery of unauthorised or unsuitable activity.
- Confusing it with a full power of attorney, which can give far wider powers, including moving money, signing contracts and dealing with assets held elsewhere.
Questions
People also ask.
Can the agent take fees from the account?
Only if the owner has separately agreed to fees in writing and the broker has been told how they are to be paid; the trading authority alone does not allow payments out.
How do I cancel it?
Write to the broker revoking the authority, and keep proof that the broker received your notice, because the broker may keep accepting orders until it has processed your instruction.
Is it the same as a discretionary account?
No, a limited authority can be tailored with restrictions, whereas discretionary management usually gives the manager broad freedom to decide what to trade and when, within the stated investment objectives.
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