Managed Accounts cannot exist without a Limited Power of Attorney.
Also known as an LPOA, this legal document authorizes a trader or money manager to legally manage the account on behalf of the investor or client. It is a document that investors must sign before their money is managed.
How Much AUTHORITY Does the Manager Have?
As the name implies, the amount of "authority" that the money manager has over the account is "limited;" limited to make decisions to buy and sell within the account only – and not "full" authority to initiate withdrawals from or deposits to the account.
Even though in the legal world the name "Power of Attorney" (POA) is used to indicate complete authority to act on behalf of the client or full control, this is usually not the case in the brokerage world. When a broker refers to a "Power of Attorney" (and some even categorize their document as a "POA"), they are typically not implying full manager control (only partial). This can be verified by reading the language on the document itself to confirm that the money manager only has limited authority to place trades in the customer's account.
LPOA Can Include Fees
Even though the power of attorney fora managed account typically specifies the fees or costs associated with a particular program, this is not necessarily so. The POA's of some brokerage firms do not state the fees, in which case they would provide the investor an additional fee disclosure document with the specific charges (management fees, performance fees, etc.) of the program. The brokerage firm is the one responsible for withdrawing the manager's fees from the customer's account.
Does the LPOA Protect the Investor?
The LPOA protects both the investor and the money manager, who must also sign the power of attorney.
The client is protected because the brokerage firm becomes the intermediary responsible for withdrawing only the stated amount of fees from the account (so that the manager does not have access to the funds).
The manager is protected because the brokerage firm will make sure that he'll get paid the fees he's owed. The broker will also provide trading access to the manager and "view-only" (also known as "read-only") access to the investor, since the investor (by signing the LPOA) designated the manager as the only one in charge of making the trading decisions.
Another way an investor can protect himself is by revoking the POA at any time, which will restrict the manager from continuing to trade in the account. To revoke the LPOA in a managed account, a brokerage firm will either require that the client sign and fax/email a special revocation form or simply send an email to the brokerage firm requesting the revocation. Once the revocation is processed by the broker, the account becomes an individual (that is, non-managed) account, which the client can control. Depending on the technology used by the brokerage firm, the client requesting a revocation may first have to wait until open positions in the account are liquidated.