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What is a Limited Power of Attorney?
Managed Accounts cannot exist without a Limited Power of Attorney. Also known as an LPOA, this legal document authorises 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.
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 categorise 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.
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.