What Is a Discretionary Account and How Does It Work?

An investor researches how to set up a discretionary account.

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A discretionary account allows a financial advisor or portfolio manager to make investment decisions for the account holder. This type of account suits investors who prefer not to manage their investments directly or don’t have the time and expertise to do so. By giving the advisor authority, the investor lets them manage the investments according to the account’s goals, risk tolerance and financial objectives. Using a discretionary account to work with a financial advisor can lead to personalized, professional management, which could help you simplify or enhance your investment strategy.

A discretionary account allows a financial advisor or broker to make, buy and sell decisions without prior approval from the account holder. These accounts operate under a legal agreement that specifies the advisor’s authority to make decisions that align with the investor’s goals.

For example, a high-net-worth investor might set up a discretionary account with a financial advisor who oversees multiple asset classes like stocks and bonds, identifies opportunities and executes trades. This approach allows for timely decisions, especially in volatile markets.

When opening a discretionary account, the investor signs an agreement granting the advisor or portfolio manager the authority to manage the account within specified parameters. These parameters include the account’s risk tolerance, investment objectives and any restrictions, such as avoiding specific industries or asset types.

The advisor’s primary responsibility is to act in the client’s best interest, adhering to fiduciary standards. This involves creating an investment plan, selecting appropriate assets and making adjustments as market conditions change.

For example, if the account’s objective is income generation, the advisor may focus on dividend-paying stocks and bonds. Growth-oriented accounts, by comparison, might prioritize equities with strong potential for capital appreciation.

A woman comparing the pros and cons of using a discretionary account.

Discretionary accounts can offer many benefits. Here are four to consider:

Professional management: Advisors with discretionary accounts bring expertise in navigating complex markets. They actively monitor your portfolio and make informed decisions to align with your investment strategies, which can be especially beneficial in volatile or specialized markets.
Time-saving: With a discretionary account, you don’t need to be involved in every decision. This hands-off approach saves time and reduces the stress of constantly monitoring markets.
Timely execution: Advisors quickly respond to market changes, seizing opportunities or mitigating risks without waiting for your approval. This agility can be crucial in dynamic markets.
Customization: The advisor tailors the portfolio to meet your specific goals, preferences, and restrictions. For instance, if you prefer sustainable investments, the advisor can construct a portfolio focused on ESG (Environmental, Social, and Governance) criteria.

Discretionary accounts also have some downsides. Here are four to keep in mind:

Cost: Discretionary accounts typically come with higher management fees than non-discretionary accounts. These fees can impact overall returns, especially for smaller portfolios.
Loss of control: By granting authority to an advisor, you relinquish direct control over investment decisions. This can be challenging for investors who prefer a more active role in their portfolio management.
Potential for misalignment: While fiduciary advisors are required to act in your best interest, there’s always a risk that the advisor’s decisions may not perfectly align with your expectations or preferences.
Performance variability: The success of a discretionary account depends on the advisor’s skill and judgment. Poor performance or mismatched strategies can lead to unsatisfactory outcomes.

To set up a discretionary account, you will need to work with a financial expert who can help you manage your investments. Here are five general steps to help you get started:

Choose a financial advisor or broker: Research top financial advisors or brokerage firms with a strong track record, relevant expertise and a fiduciary commitment. Consider reviews, credentials and personal recommendations.
Define your objectives: Clearly communicate financial goals, risk tolerance, time horizon and any restrictions. This ensures the advisor tailors the strategy to your needs.
Review the agreement: Carefully read the discretionary account agreement. Pay attention to details such as fees, the advisor’s authority and the investment strategy.
Fund the account: Deposit the initial investment amount into the account. Make sure the funding aligns with the agreed-upon strategy and minimum requirements.
Maintain communication: While the advisor manages the account, regular updates and performance reviews are essential. Schedule periodic check-ins to maintain your strategy on track.

A woman reviews her investment portfolio.

A discretionary account can offer you a hands-off investment approach that is managed by experts, if you want professional oversight for your portfolio. By giving a financial advisor the authority to make decisions, you save time and benefit from customized strategies that adapt quickly to market shifts. Although there are costs and compromises, such accounts can offer convenience and help you reach your financial goals.

A financial advisor can help you create and manage a portfolio. 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.
If you want to build your savings up consistently, consider setting up automatic transfers from your checking to your savings accounts. This approach could help you make saving a routine part of your financial life.

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