The conferral of exclusive rights to a trading agent or a broker to manage and control a client’s investment accounts
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Trade authorization is the level of power or authority extended to a broker or an agent by a client to execute all transactions, thereby establishing accountability of the trading accounts and assets.
The trading authorization concept is relatively similar to a power of attorney and is established before a new agent assumes their role. It relieves a client of certain liabilities while imposing those liabilities upon the broker or an agent with whom such power or discretion is vested.
Trading authorization refers to the conferral of exclusive rights to a trading agent or a broker to manage and control a client’s investment accounts.
With trading authorization, a third-party agent holds exclusive rights to conduct and manage all of the account’s activities according to the client’s objectives.
There are two levels of trading authorizations: (1) limited trading authorization, which allows the agent to act on profitable trading opportunities but limits withdrawals, and (2) full trading authorization, which permits the agent to carry out all the account’s activities available to the client.
How Trading Authorization Works
When to Use
The level of a trading authorization allows a third party to access a few roles and responsibilities on designated accounts on behalf of the investor. Trading authorization becomes worthwhile when an investor chooses to seek a financial professional’s services on financial advisory. It applies to both established and new investment accounts.
An authorization by an investor to a third party to manage an investment account can take either of the two forms of trading authorization – full trading authorization or limited trading authorization. For the authorizations to be effective, they must be in writing. The principal account holder gives the chosen agent the discretion to spend funds and sell or dispose of funds based on formally documented consent.
The primary account holder does not lose the rights to act even after giving powers to the agent. The professional adviser must operate as per the provided instructions in the best interest of the client. The client can request information from the agent at any time.
If the investor wants to revoke a previous trading authorization to execute a new agreement, a written and dated notice showing a revocation of the initial broker and the financial institution in which the account is located is addressed to the new broker. The client still holds the discretion to revoke the authorization for any reasonable cause, provided he is of sound mind.
The revocation cannot in any way affect the liability resulting from the initially active transactions. However, if a client is not of sound mind, the agent may cease to offer financial advisory services through a permanent court injunction for acting improperly.
Levels of Trading Authorization
An authorization by an individual to an agent may either be full trading authorization or limited trading authorization.
1. Full Trading Authorization
Under the full trading authorization, the professional financial manager holds exclusive rights to perform all the activities pertaining to the account pursuant to the primary account holder’s objectives.
The full trading permission gives an agent the right to conduct all the account activities available for the client, including access and withdrawal of funds. Additionally, it obliges the financial organization to follow the authorized agent’s instructions, including delivering securities and payments, without restrictions.
2. Limited Trading Authorization
A third-party agent operating under a limited trading authorization can trade using funds held in the underwriter’s investment account. As a result, profitable trading opportunities can be explored on behalf of the undersigned.
Additionally, limited trading authorization allows the agent to borrow the necessary funds in compliance with the provisions of a margin transaction, not to mention requesting the delivery of money and securities from the underwriter’s account.
Additional items the third-party agent may include communications and information about the account. Limited trading authorization does not permit a third-party agent to withdraw or redeem assets from the primary holder’s account, unlike in full trading authorization.
Processes and Procedures of Trading Authorization Process
Most brokerage firms incorporate the trading authorization concept into their business practices. Several brokerage firms, including Morgan Stanley or Edward Jones, allow their holders to designate trading authorization to professional third parties. The third-party agent may be an in-house staff to the brokerage company or an unaffiliated agent.
In other instances, the power to manage an underwriter’s account may be conferred on a family member. Various brokerage firms follow different processes and procedures for designing trading authorizations. Usually, a brokerage firm will give their clients trade authorization forms, alongside other documentations through their online portals.
To authorize a third-party agent, the investor is required to fill out a combination of the necessary documentation and follow the firm’s submission process. Afterward, brokerage firms will contact their clients to notify them of the establishment of the trading authorization, permitting the agent to start performing roles on the client’s behalf.
CFI is the official provider of the global Capital Markets & Securities Analyst (CMSA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:
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