What is a Discretionary Account?

Discretionary accounts are investment accounts that are structured to allow the broker or another authorized individual to manage the assets of the investor without the need to clear the transactions with the investor beforehand. This approach is usually employed when the investor has a great deal of confidence in a given brokerage house or an individual and feels comfortable enough to turn over all trading decisions to the broker or other person. While the authority to make trading decisions on behalf of an investor is present with any discretionary account, the investor remains the owner of the account and has the ability to revoke privileges at any point in time.

Sometimes referred to as a controlled account or managed account, the real advantage of a discretionary account is that it allows the investor to be involved in the investing process as he or she wishes. Individuals who are extremely busy with career or family concerns often find the creation of a discretionary account the ideal way to grow an investment portfolio. Because someone trustworthy is managing the investments, there is no need for the investor to spend time researching potential purchases, projecting future performances, or wondering if a given security should be put up for sale in the near future.

The investor who chooses to have his or her portfolio managed by a third party always has the ability to look at the current status of the holdings, their current performance levels, and how much of a return was generated in a recent period. It is not unusual for the manager of the discretionary account to either supply the investor with periodic reports, or arrange for the investor to peruse recent activity via a secure channel over the Internet.

At any point in time, the investor has the ability to revoke the privileges of the individual or entity managing the discretionary account. This type of action may be taken when the investor begins to suspect that the manager is not making decisions that are in the best interest of the investor. At other times, the investor may simply wish to become more actively involved in the investment process. When this is the case, the manager of the discretionary account and the investor may develop a plan to incrementally turn over various management functions to the investor, thus ensuring some degree of continuity during the migration of responsibilities.