What it means
When you open a brokerage account, you are the only person allowed to give instructions. A trading authorization changes that by naming another person who can place orders on your behalf.
The paperwork is signed by the account holder and filed with the firm that holds the account. There are two main versions.
Under a limited authorization, the agent can buy and sell but cannot take money or securities out of the account. Under a full authorization, the agent may also withdraw funds or make transfers, which carries much greater risk and is granted far less often.
Firms also distinguish between discretionary and non-discretionary arrangements. In a discretionary account the agent decides what to trade without asking first, while in a non-discretionary account the agent suggests trades and the owner approves each one.
The authorization document should say which applies. Businesses use trading authorizations in practice for treasury and investment management.
A company might authorise a finance manager to place trades within approved limits, or an external investment manager to run a portfolio under a signed mandate. The document is usually accompanied by an investment policy that sets limits on instruments, concentration and risk.
The main risk is misuse, such as excessive trading to generate commissions, which is known as churning, or trading outside the agreed policy. To limit this, owners should review statements promptly, set clear written limits, insist that withdrawals go only to accounts in the owner's name and revoke the authorization in writing when the relationship ends.
Keep in mind that the owner usually remains legally responsible for the account and its losses, even when the agent is the one who placed the trade. Choosing a regulated and reputable agent is therefore part of the control framework.
In practice
Real-world examples.
Example
A founder with a busy travel schedule signs a limited trading authorization so her accountant can place buy and sell orders in the company's investment account. The authorization forbids withdrawals, so cash can only be moved to the company's own bank account. Each month the founder reviews statements for unusual activity.
Example
A retired engineer hires a registered adviser to manage a portfolio under a discretionary mandate. He signs the firm's authorization form, and the adviser trades within a stated risk level. Quarterly reports allow him to see every transaction and its cost.
Example
A small manufacturer's board approves its finance manager to place currency hedges up to $2,000,000. The bank records the authorization and rejects any trade above that figure. The limit gives the board comfort without requiring approval of each deal.
Case study
Seen in the real world.
Oakhaven Logistics is a fictional company that granted its financial controller a limited trading authorization over its investment account. The board policy capped any single trade at $500,000 and banned withdrawals to third parties. This illustrative scenario shows how the document works in practice.
When the controller left the company, the board promptly sent written notice revoking the authorization and the broker confirmed in writing that it had taken effect. Two weeks later a former colleague tried to place a trade using old log-in details, and the broker refused it. The illustrative lesson is that revoking authority quickly and in writing closes a gap that often goes unnoticed.
The board also added a yearly review of every authorization on file, listing who holds it, what it permits and whether the person still needs it. The review took one hour and found two outdated authorizations that were then cancelled.
Watch out
Common mistakes.
- Granting full authority when limited authority would do. A full authorization allows withdrawals, which turns a trading risk into a possible theft risk.
- Forgetting to revoke the authorization when the relationship ends. The firm will keep honouring it until it receives written notice, so a verbal instruction or a farewell email to the agent is not enough.
- Assuming the agent carries the losses. The owner generally bears the investment losses unless the agent has acted negligently or outside the mandate.
Questions
People also ask.
What is the difference between a trading authorization and a power of attorney?
A trading authorization is narrower and applies only to a specific account, while a power of attorney can cover wider legal and financial affairs.
Can I limit what the agent can trade?
Yes, most firms allow restrictions on instruments, sizes and markets, and it is wise to write these into the mandate. Restrictions such as a ban on borrowing or on single-share positions above a set percentage of the portfolio are common.
Who monitors the agent?
The firm's compliance function monitors for suitability and abuse, but the account owner should still check statements and trade confirmations regularly.
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