Discretionary Account

What is a 'Discretionary Account'

A discretionary account is an investment account that allows a broker to buy and sell securities without the client's consent. The client must sign a discretionary disclosure with the broker as documentation of the client's consent. A discretionary account is sometimes referred to as a managed account; many brokerage houses require client minimums (such as $250,000) to be eligible for this service.

BREAKING DOWN 'Discretionary Account'

Depending on the specific agreement between investor and broker, the broker may have a varying degree of latitude with a discretionary account. The client may set parameters regarding trading in the account. For example, a client might only permit investments in blue-chip stocks. An investor who favors socially responsible investing may forbid the broker from investing in tobacco company stock or in companies with poor environmental records. An investor might instruct the broker to maintain a specific ratio of stocks to bonds but permit the broker freedom to invest within these asset classes as the broker sees fit.

Advantages of Discretionary Accounts

The first advantage of a discretionary account is convenience. Assuming that the client trusts the broker's advice, providing the broker latitude to execute trades at will saves the client the time it takes to communicate with the broker before each potential trade. For a client who trusts his broker but is hesitant to hand the reins over in full, this is where setting parameters and guidelines comes into play.

Most brokers handle trades for a multitude of clients. On occasion, the broker becomes aware of a specific buying or selling opportunity beneficial to all of his clients. If the broker has to contact clients one at a time before executing the trade, the trading activity for the first few clients could impact the pricing for the clients at the end of the list. With discretionary accounts, the broker can execute a large block trade for all clients, so all of his clients will receive the same pricing.

Discretionary Account Setup

The first step to setting up a discretionary account is finding a registered broker who offers this service. Depending on the brokerage house, an account minimum may be required to set up a discretionary account. For example, Fidelity offers three levels of managed accounts, one with a $50,000 minimum investment and each of the other two requiring a $200,000 minimum. The managed account levels with higher minimums offer broader menus of services and lower management fees.

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