Im Jeff Sonn, an attorney concentrating on securities fraud and consumer class actions. I use this blog to bring attention to regulatory filings involving financial advisors, current events in securities and cases in the financial services industry, and to help investors understand their rights and options for financial recovery. Questions? Contact me online or call anytime at 844-689-5754

Non When you open up a new account with a brokerage firm, one of the first things you need to know is whether your account is ‘discretionary’ or ‘non-discretionary’.

Many investors simply have no idea as to the status of their account.

One of the main reasons for this is that far too many brokers and brokerage firms fail to explain the important differences between these two types of accounts.

Discretionary vs. Non Discretionary Accounts

A discretionary account is an account that gives an investment adviser the authority to make individual trades without the consent of their client. A non-discretionary account is an account where the client always decides whether or not to conduct a trade.

What is a Discretionary Account?

In a discretionary account the broker will have the ability to determine if a certain trade is wise or not at their own ‘discretion’.

However, this type of account certainly does not give a broker the power to make whatever trades they want. Decisions must always be made that are in the best interests of the client and that are consistent with the client’s individual investment objectives.

What is a Non-Discretionary Account?

In the case of 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 may still recommend trades to the client.

However, they do not have the legal authority to make any securities sales or purchases without first getting approval from the customer.

Which Type of Account Should You Choose?

The choice between a discretionary account and a non-discretionary account is an important decision that you will have to make when you first open an account. Ultimately, which choice is better for you will depend on your unique needs as an investor. Here, we discuss some general advantages of each type of account.

Advantages of Selecting a Discretionary Account

  • Passive account management: Many people are just too busy to keep up with day-to-day developments in the market. One of the primary benefits of using a discretionary account is that it allows you to invest without putting a lot of time into the activity.
  • Ability to limit discretion: Choosing a discretionary account means that you are giving your broker the ability to conduct transactions without your knowledge. However, how much ‘authority’ you give your broker can vary considerably. For example, you can give your broker very limited authority to only make conservative investments.
  • Automatic account rebalancing: Since your broker does not have to consult with you before making individuals trades, they can rebalance your portfolio automatically. For instance, if you always want your account to have 60 percent stocks and 40 percent bonds, your broker can make this happen without the hassle of getting your approval.
  • Access to better prices: Finally, a discretionary account can often let you get better prices on your trades. Consider this example: Your brokerage firm has determined that a certain stock should be bought at the current price. The firm wants to make this trade for nearly one hundred of its clients. If your account is discretionary, such a trade can be made immediately so that you can get the best price. With a non-discretionary account, your broker will need to contact you first, and the good price may disappear before you are able to give approval.

Advantages of Selecting a Non-Discretionary Account

  • Hands-on management: Many investors want hands-on management over their own account. These investors may want the 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 often works best.
  • Ability to assess financial advice: Not all investors are comfortable allowing another party to manage their assets without approval. You may want to assess the recommendations being made by your broker before you actually decide if the trade is truly right for you. Ultimately, giving a broker trading authority requires putting a tremendous amount of trust in that individual. That relationship is simply not right for every investor.
  • Low minimum required investment: Discretionary accounts often have large minimum investment requirements. In many cases, the minimum required investment is more than six figures. Non-discretionary accounts generally have much lower minimum requirements.

Finally, it should be noted that your decision is never set in stone. You can always change your mind and give (or take away) trading discretion from your broker or brokerage firm.

Contact Our Office Today

If your investment adviser engaged in unauthorized trading, or if they have made unsuitable investments on your behalf, our team can help. From our primary office in Miami, we represent wronged investors throughout the United States, South America and Mexico. To set up a free review with a securities arbitration attorney, please call our team today at 1-877-969-2412.

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