What is a Discretionary Account?
A discretionary account is an investment account that allows an authorized broker and/or investment manager “Authorized Person” to buy and sell securities without the client’s consent for each trade. The client must sign a discretionary disclosure with the Authorized Person as documentation of the client’s consent.
As discretionary account arrangements can vary, investors should be clear about the mandate and authorities assigned to the Authorized Person, in consideration of the investment objectives, risks, and fees etc.
Discretionary accounts can be broadly classified into two categories.
1. Discretionary account management services provided as an ancillary part of brokerage services without setting up an investment mandate
This type of discretionary account service usually covers only exchange traded products, and therefore, no investment mandate will be set up with the client. For an example, when a client opens an account with the brokerage firm, the client authorizes the brokerage firm to operate his account to conduct trading.
2. Discretionary accounts with an investment mandate or a predefined model investment portfolio
Generally, this type of service covers a wider range of investment products, including both exchange traded and non-exchange traded investment products.
Before deciding the investment mix, discretionary account managers normally discuss with the client the investment objectives, risk appetite and personal circumstances.
Alternatively, the discretionary account managers may build various predefined model investment portfolios with different investment products for selection by the client.
Once discretionary authority is granted, the Authorized Person will be able to act on its own initiative without asking the client. Investors should monitor their accounts closely and check each transaction, including the balance and trading details to ensure that the transactions are consistent with their investment mandates and objectives to avoid any unscrupulous discretionary Authorized Person churning the managed account or select products with high commissions for their own benefits.