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 following an agreed-upon investment strategy.

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.

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 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 instruction and have a duty to do so at the best possible price. 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.

Discretionary vs. Non-Discretionary Accounts at a Glance

The main distinction between discretionary and non-discretionary accounts is who has the final authority to place trades. In a discretionary arrangement, an advisor can generally buy or sell investments without getting the client’s permission for each transaction, provided those decisions remain within the authority granted by the client. With a non-discretionary account, the investor must approve individual trades before they are executed.

Here’s a side-by-side comparison:

Feature	Discretionary Account	Non-Discretionary Account
Trade authority	Advisor has authority within established guidelines	Investor retains final authority
Approval for individual trades	Generally not needed	Generally required
Investor participation	Less day-to-day involvement	More direct involvement
Response to market changes	Advisor can make permitted trades without waiting for client approval	Execution may depend on obtaining client authorization
Advisor recommendations	Advisor can identify opportunities and act within the account mandate	Advisor can suggest trades for the investor to consider
Investment limitations	Investor can establish boundaries for how the account is managed	Investor decides whether to approve proposed transactions
Investor’s degree of delegation	Greater	Lower
Investor oversight	Investor can monitor activity and periodically review the strategy	Investor participates directly in individual investment decisions

Choosing between the two structures largely comes down to how much investment authority you want to delegate. A discretionary account may appeal to someone who prefers professional management without approving routine transactions. A non-discretionary account may be more appropriate for an investor who wants to remain involved in each trading decision.

In either case, investors can review how the account will operate before opening it, including the advisor’s authority, investment guidelines, communication practices and any applicable costs.

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 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 you’re 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: 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 might seem less risky because 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 preferences 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 you document the investment strategy you must follow?
How often do you communicate with clients about portfolio changes?
What recourse exists if trades fall outside our 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

Choosing between discretionary and non-discretionary investment accounts depends largely on how much control you want over investment decisions. A discretionary account allows an advisor to make trades within the agreed investment mandate without seeking approval for each transaction, while a non-discretionary account leaves the final decision with you. Comparing the level of authority, fees and day-to-day involvement required by each can help you decide which structure fits your preferences and investment goals.

“A discretionary account places more power in your advisor’s hands, but there’s a price to pay. Typical asset under management (AUM) fees can run around 1% of your balance, so you need to consider whether having an advisor place trades on your behalf is worth that cost. For some, it may be a small price to pay to save on time and research,” Tanza Loudenback, CFP®.

Tanza Loudenback, CFP® provided the quote used in this article. Please note that Tanza is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinion voiced in the quote is for general information only and is not intended to provide specific advice or recommendations.

Tips for Investment Management

A financial advisor can help you select investments, set an asset allocation and rebalance your portfolio as your financial goals change. 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.