Discretionary Account

Key takeaways

• A discretionary account authorizes a broker or advisor to buy and sell securities on a client’s behalf without obtaining approval for each trade.
• Clients can place limits or preferences (e.g., asset allocation, exclusions for certain industries).
• Traditional managed discretionary accounts typically charge 1–2% of assets under management (AUM); robo-advisers charge much less (often 0.25% or lower).
• Advantages: faster execution, professional management, ability to act on time-sensitive opportunities.
• Disadvantages: higher fees, potential underperformance, and reliance on the manager’s judgment.

What is a discretionary account?

A discretionary account is an investment account in which the client gives a broker or portfolio manager authority to make trading decisions and execute transactions without seeking consent for each trade. This authority is documented in a discretionary agreement that outlines any constraints or instructions the client requires.

How discretionary accounts work

Clients and brokers agree on the level of discretion and any investment constraints. Common client-specified limits include:
* Types of permitted investments (e.g., only blue‑chip stocks).
* Exclusions for industries or companies (e.g., tobacco or poor environmental practices).
* Target asset allocation ranges (e.g., maintain a 60/40 stock/bond mix).

With discretion, the manager can:
* Execute trades quickly, which is helpful for time-sensitive or block trades.
* Rebalance or adjust holdings according to market conditions and the client’s objectives.

Managers are expected to follow the client’s express instructions and, depending on the arrangement, may be subject to fiduciary duties requiring them to act in the client’s best interest.

Robo-advisers (automated discretionary accounts)

Robo-advisers are automated discretionary services that use algorithms to manage portfolios with minimal human intervention. Typical features:
* Passive or model-based strategies (often following modern portfolio theory).
* Options to apply client preferences (e.g., socially responsible investing).
* Very low minimums (sometimes $1–$5) and lower fees (often ~0.25% or less).

Robo-advisers are a low-cost way to get discretionary management, but they may be less customizable than a dedicated human manager.

Advantages

• Convenience and time savings—no need to approve each trade.
• Faster execution—managers can act immediately on market opportunities.
• Professional oversight—access to investment expertise and portfolio management.
• Consistent pricing for block trades across multiple client accounts.

Disadvantages

• Higher cost—traditional discretionary services typically charge AUM fees (commonly 1–2% annually).
• Performance risk—many managed portfolios do not consistently outperform the market; some studies show a substantial portion underperforming benchmark returns.
• Dependence on manager skill—results depend on the manager’s decisions and strategy.
• Potential for conflicts of interest—though fiduciary standards and disclosures aim to mitigate this risk.

How to set up a discretionary account

1. Choose a registered broker, advisory firm, or robo-adviser that offers discretionary management.
2. Review fee schedules and minimum balance requirements—managed account minimums vary widely and higher service tiers may require larger minimums but offer lower fees.
3. Complete a discretionary agreement that specifies scope, constraints, and any investment mandates or exclusions.
4. Establish reporting and communication preferences, and regularly review account performance and adherence to your guidelines.

Bottom line

A discretionary account can provide professional, timely portfolio management and convenience, but it comes with costs and performance risk. Carefully evaluate fees, minimums, manager qualifications, and the specific constraints you want the manager to follow before granting discretion.