What is a limited power of attorney?
A limited power of attorney (LPOA) is the authorization for a portfolio manager to perform specific functions on behalf of a client in that client’s account. An LPOA gives the portfolio manager discretion to perform functions, such as trading authority, disbursing power, power to pay fees and permission to send forms directly to a broker (statements of power of attorney, takeover bids, etc.). Before a client signs an AAL, he must know the specific functions he has authorized to perform by the portfolio manager, as the client will be responsible for the decisions made by the manager.
Understanding the limited proxy
The “limited” in the LPOA refers to the fact that certain essential functions of the account are always available only for the account holder, such as cash withdrawals, change of beneficiary or other important actions on the account. Clients must clearly indicate which powers they wish to retain.
Authorizations from LPOA have become more common in the past decade as many investors have transferred their accounts from standard brokerage companies to fund management companies such as registered investment advisers (RIAs). AALs allow the manager to execute his investment strategy for the client without having to continually contact the client to approve the order before it is executed.
Limited types of proxy
- Spring Powers: An LPOA which has powers of jurisdiction only becomes active if it is triggered by a stipulated event. Spring LPOs are generally used with a will or family trust. Basically, this type of AAL only takes effect when a client dies or becomes incapacitated and can no longer manage their accounts. It cannot be triggered if the client is able to manage his own affairs.
- Durable and unsustainable: Sustainable LAAs give the portfolio manager the permanent power to exercise certain functions, even after the client’s death or incapacity. The majority of ALAs are unsustainable, which means they become void when the client dies or becomes disabled.
Limited proxy forms
Clients typically complete a proxy form when they open their account with a portfolio manager. Most forms give clients the option of choosing between an LPOA or a full power of attorney. The client must provide details about their lawyer, who is usually the portfolio manager. Additional managers who intend to make investment decisions on behalf of the client should also include their contact information on the form. Once completed, the client and the lawyer (s) must in fact sign the form.
Usually, portfolio managers help their clients complete POA forms. Clients who do not know what functions they allow or who have a complicated account structure may want to ask a lawyer to review the POA form before signing it.