Discretionary vs. Non-Discretionary Investment Accounts

The difference between discretionary and non-discretionary accounts is critical. However, very few individual investors even know this difference exists. The biggest difference is that with a discretionary account, your broker can make any decisions they want with your investment funds. That is not the case with a non-discretionary account, where you must permit each decision.

A financial advisor can help ensure that you set up the right type of investment account for your financial needs.

What Is a Discretionary Investment Account?

A discretionary investment account is sometimes known as a managed account. It authorizes your broker to execute individual trades without your approval. They have the discretion to buy or sell assets on their own.

A discretionary investment account is not a blank check. In most cases, your advisor will still have an ethical or fiduciary duty to act in your best interests. This means they will also be bound by the investment strategy you agreed upon.

Your advisor also cannot access money outside this specific portfolio. For example, they cannot use a linked bank account to make purchases at their discretion.

However, within those boundaries, your broker will have the authority to execute trades without first seeking client approval. They can use their own judgment as to what’s best for your portfolio.

What Is a Non-Discretionary Account?

In a non-discretionary account, a broker has no independent authority to execute trades. They can only buy and sell assets at their client’s instructions and have a duty to do so at the best possible price upon those instructions. The broker has no discretion over which investments to make or when to execute any given trade.

Brokers in a non-discretionary account can typically still advise their clients. Often, in these accounts, the client and the broker develop an investment strategy together. The broker identifies specific investments before seeking the client’s explicit approval to execute those trades.

Benefits of Discretionary vs. Non-Discretionary Accounts

Each account type has its benefits and drawbacks.

The largest benefits relate to how investments are made and how much they cost.

1. Passive vs. Active Investing

Discretionary accounts are often good for passive investors who want to balance active investment with a hands-off approach to their portfolio. By letting your broker make decisions independently, you can have more active management of your account without needing to make those trades yourself.

Non-discretionary accounts are good for investors who either want to take a much more hands-on approach to their money. With this account, you can make your own trading decisions while still benefiting from a broker’s advice.

It can also work for an extremely passive approach to investing. You can lock in a long-term position and prevent your broker from altering it.

It’s important to note that even with a discretionary account, your broker must still comply with any instructions you give them. If you want them to avoid a certain investment, you can simply tell them to do so.

2. Timing And Details

Discretionary accounts can benefit from better timing.

If your broker sees a particularly good opportunity, they have the flexibility to pursue it without waiting for you to get back to them. This also allows your broker to make small, regular changes in accordance with your instructions.

For example, say you want a specific balance of assets or a specific risk profile. Your broker can make small changes periodically rather than asking you about a large group of changes all at once.

3. Fees

Non-discretionary accounts typically have lower management fees; sometimes, significantly less. They also usually have lower minimum investments.

This makes it cheaper to open and maintain a non-discretionary account. This is a huge benefit if you’re not investing a large amount or just dipping your toe into certain investments.

4. Trust

A non-discretionary account means that no one else has authority over your money. This is extremely important for many investors.

Your broker can still find good trades on your behalf and make recommendations, but you have final approval before they buy or sell any assets.

By contrast, a discretionary account requires an enormous amount of trust. You allow this person to make independent decisions with your money, even if they must follow your instructions. You need to be very comfortable with their judgment to do this, or at least trust their years of experience.

Risk: in Discretionary vs. Non-Discretionary Accounts

Discretionary accounts inherently carry a unique set of risks.

Since the financial advisor has autonomy to make investment decisions, the client is placing significant trust in the advisor’s expertise and judgment. This can be beneficial if the advisor is experienced and knowledgeable, but it also means the client may be exposed to poor decision-making. Additionally, the lack of client oversight can lead to misalignment between investment strategies and the client’s financial goals if not properly communicated.

Non-discretionary accounts offer a different risk profile. The requirement for client approval on each transaction gives investors more control over their portfolios. This can be reassuring for those who prefer a more active stance in their investment decisions.

However, the need for constant communication and approval can lead to missed opportunities, especially in volatile markets where timing is crucial. The risk here lies in the potential for slower response times to market changes, which can impact the overall performance of the investment portfolio.

How to Decide Which Account Type Is Right for You

The right account type depends less on which one sounds better in theory and more on how you actually want to engage with your investments and your advisor.

When a Discretionary Account is Best

A discretionary account tends to work well for investors who have a clearly defined investment strategy, trust their advisor’s judgment and do not want to be involved in day-to-day trading decisions.

If you travel frequently, have a demanding schedule or simply prefer to delegate portfolio management to a professional, giving your advisor discretionary authority can be advantageous. This allows them to act on opportunities and manage risk without waiting for your approval.

This arrangement works best when you have taken the time to communicate your goals, risk tolerance and any specific holdings you want left alone before granting that authority.

When a Non-Discretionary Account is Best

A non-discretionary account is a better fit if you want final say over every transaction, are still developing your investment knowledge or have concentrated positions, tax considerations or personal preferences that require your input before making any trade. It also makes sense if you are working with a new advisor and want to build trust gradually before considering broader authority.

Before opening either type of account, there are a few questions worth asking any advisor you are considering.

How do they document the investment strategy they must follow?
How often do they communicate with clients about portfolio changes
What recourse exists if trades fall outside your agreed parameters?

For discretionary accounts specifically, ask whether the advisor operates under a fiduciary standard. This legally requires them to act in your best interest rather than simply recommending suitable investments.

If you do choose a discretionary account, put your investment guidelines in writing at the outset. Specify any assets you do not want traded, your target asset allocation and how you want to be notified of significant changes. Reviewing account statements regularly and scheduling periodic check-ins with your advisor ensures the account continues to reflect your goals even when you are not making the day-to-day investment decisions.

A financial advisor can walk you through both options, explain how they structure discretionary relationships and help you determine which level of involvement makes the most sense for your situation.

Bottom Line

Understanding the differences between discretionary and non-discretionary investment accounts is crucial for investors seeking to align their financial strategies with their personal goals and risk tolerance. Ultimately, the choice between these two types of accounts depends on the investor’s level of expertise, desired involvement and trust in their financial advisor. By carefully considering these factors, investors can make informed decisions that best suit their financial objectives and comfort levels.

Tips for Investment Management

Finding a financial advisor to manage your investments can be difficult if you don’t know where to start. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
What’s the value of a broker? Investment brokers do much more than just execute trades on your behalf. They also advise you on how to make the most of those investments and your money overall.