Limited Discretionary Account

What Is a Limited Discretionary Account?

A limited discretionary account is a type of account in which a client allows a broker to act on their behalf in buying and selling securities. A limited discretionary account is an intermediate between a discretionary and non-discretionary account.

In a limited discretionary account, the broker can make certain types of trades without prior consent from the client. In order for this arrangement to take place, the investor has to sign an agreement stating that they are allowing certain trades without consent. Except as explicitly stated in the agreement, the account can be considered a non-discretionary account. 

Key Takeaways

  • A limited discretionary account allows a broker to make certain trades on a client’s behalf.
  • The broker’s discretion must be explicitly stated in the account agreement and does not extend to any trading not agreed to ahead of time in the agreement. 
  • A limited discretionary account is mid-way between a discretionary and a non-discretionary account, with some of the benefits of each. 

Understanding Limited Discretionary Accounts

A limited discretionary account is also referred to as a "controlled account," which is any account for which trading is directed by someone other than the owner. It is also called a managed account, an investment account that is owned by an individual investor and overseen by a hired professional money manager. In contrast to mutual funds, which are professionally managed on behalf of many mutual-fund holders, managed accounts are personalized investment portfolios tailored to the specific needs of the account holder.

For example, in a limited discretionary account, the investor might agree to let the broker engage in transactions to automatically rebalance the account to maintain a specified ratio of stocks, bonds, or other assets, but not to engage in other types of trades on the account holder’s behalf. 

Limited-Discretionary vs. Non-Discretionary Accounts

A limited discretionary account arrangement empowers a broker or advisor to initiate a certain trade on behalf of the client. The agreement will also specify any of the client's limitations. A client who gives a broker or advisor this type of power must have complete trust in the person, as the arrangement can be risky. However, any decisions a broker or advisor makes must align with the client's stated investment goals.

In a non-discretionary account, the broker’s job is to execute the desired transaction at the best available price. Depending on the exact nature of the broker-client relationship, a broker who oversees a non-discretionary account will recommend trades to the client. However, brokers lack the legal authority to buy or sell securities without first obtaining approval from the customer.

Advantages of Limited-Discretionary vs. Non-Discretionary Accounts

Some investors prefer the arrangement of a limited discretionary account because they are just too busy to keep up with day-to-day developments in the market. One of the primary benefits of using a limited-discretionary account, like a discretionary account, is that it allows a person to invest without putting a lot of time into the activity. It also allows the client to fully benefit from the specialized knowledge and experience of the broker with respect to investments. 

On the other hand, many investors prefer non-discretionary accounts for a few reasons. Many investors want hands-on management over their accounts and are wary of placing too much trust in their broker; that relationship is simply not right for every investor. These investors may desire some guidance from a professional, but may still desire to be heavily involved in the process of making their investment decisions. For hands-on investors, a non-discretionary account is typically the best option.

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