Glossary term
Discretionary Account
A discretionary account is an investment account where an authorized broker or adviser can make certain trades without getting approval for each transaction.
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What Is a Discretionary Account?
A discretionary account is an investment account in which a customer gives a broker, adviser, or portfolio manager authority to make certain investment decisions without asking for approval before each trade. The authority must be documented and limited by the account agreement and applicable rules.
Discretion can cover what to buy or sell, how much to trade, or when to trade. It should not be confused with casual convenience or a one-time instruction from a client.
Key Takeaways
- A discretionary account gives an authorized professional trading authority within agreed limits.
- FINRA rules require prior written customer authorization and firm acceptance for brokerage discretionary accounts.
- The account must be reviewed for excessive or unsuitable activity.
- Discretionary authority can be broad or limited depending on the agreement.
- Clients still need to understand fees, strategy, risk, and oversight.
How Discretionary Accounts Work
The customer signs an agreement authorizing a specific person or firm to exercise discretion. The firm accepts the account, supervises activity, and reviews trading. The professional can then act within the agreed mandate without calling the customer before each order.
Discretion is common in managed portfolios because the adviser needs to rebalance, implement model changes, harvest losses, or adjust holdings efficiently. It can also create risk if authority is unclear, poorly supervised, or used to trade too frequently.
Some instructions do not create discretion. If a client tells a broker to buy a specific security, quantity, and time, the broker is generally carrying out an order rather than deciding the investment terms for that transaction.
Discretionary vs. Non-Discretionary Accounts
Feature | Discretionary account | Non-discretionary account |
|---|---|---|
Trade approval | Professional may act within authority | Client approves each trade |
Documentation | Requires written authorization | Regular account agreement may be enough |
Speed | Can implement changes quickly | May wait for client approval |
Oversight need | High | Still important, but authority is narrower |
Limits and Misunderstandings
A discretionary account does not give a broker unlimited freedom. The professional must act within the client's objectives, restrictions, account documents, and regulatory duties.
It also does not eliminate client responsibility. The client should review statements, understand the strategy, monitor costs, and know how to revoke or change discretionary authority.
The Bottom Line
A discretionary account can make portfolio management more efficient, but it depends on trust, clear authorization, strong supervision, and a strategy the client understands. Authority should be explicit, documented, reviewed periodically, and not assumed by anyone.