A discretionary account is a brokerage or advisory account in which you give a named broker or investment adviser prior written authority to buy and sell securities on your behalf without asking your permission before each trade. You still set the overall strategy, risk tolerance, and any restrictions; the professional handles the day-to-day decisions about what to trade, when, and how much. The appeal is speed and convenience. The tradeoff is that someone else is moving your money, so the rules governing that authority are worth knowing before you sign.
How the Authorization Is Set Up
No broker or registered representative can exercise discretion over your account without your prior written authorization. FINRA Rule 3260 requires that you grant authority to a specific, named individual, and the brokerage firm itself must formally accept the account in writing through a designated partner, officer, or manager.1FINRA.org. FINRA Rule 3260 – Discretionary Accounts The two-step design keeps a broker from trading based on a casual phone conversation or a vague verbal understanding.
In practice, you sign either a discretionary disclosure document or a limited power of attorney. The paperwork names who has trading authority, what kinds of transactions they can make, and any limits you want to impose. The firm’s compliance department reviews the documents before the account goes live, confirming the individual is qualified and that the firm is prepared to supervise the arrangement.
If your professional is a registered investment adviser rather than a broker-dealer, the adviser must also report their discretionary authority on SEC Form ADV, which is filed with the SEC or state securities regulators and made available to the public.2SEC. Form ADV General Instructions You can check that filing to verify the authority someone claims to have.
What the Manager Can and Cannot Do
Once the authorization is active, your manager decides which securities to buy or sell, in what quantity, and at what price. That covers stocks, bonds, exchange-traded funds, and other securities within the scope of your agreement. The point of the arrangement is to let the manager respond to the market in minutes rather than wait hours for you to return a call.
Full discretionary authority is broader than what’s called price-and-time discretion. Full discretion means the broker controls every aspect of the trade. Price-and-time discretion is narrower: you’ve already told the broker what to buy or sell and how much, and you’re only letting them choose the moment and price to execute that specific order. Price-and-time discretion expires at the end of the business day you granted it, unless you provide signed, dated written instructions extending it.1FINRA.org. FINRA Rule 3260 – Discretionary Accounts An exception exists for institutional accounts using good-till-cancelled orders on a “not held” basis; for individual retail investors, the one-day default applies.
Even under a full authorization, the discretion is not unlimited. The investment objectives and restrictions in your account documents are the hard boundaries. A manager with discretion over a conservative retirement account cannot suddenly load it with speculative penny stocks. Most disputes start here: the broker had authority to trade, but the trades didn’t match the client’s documented goals.
You typically build those documented goals in an Investment Policy Statement or a similar profile that spells out risk tolerance, time horizon, income needs, and asset allocation. Update it promptly when your life changes, because your manager’s trades will be judged against what’s on file, not what you mentioned in passing.
Who Is Managing the Account and What They Owe You
The standard of care your professional owes you depends on whether they are a registered investment adviser or a broker-dealer, and the difference matters in a discretionary setting.
Registered investment advisers are fiduciaries under the Investment Advisers Act of 1940. The SEC has said this fiduciary duty comprises a duty of care and a duty of loyalty, requiring the adviser to serve the client’s best interest and never place their own interests ahead of the client’s.3Securities and Exchange Commission. Commission Interpretation Regarding Standard of Conduct for Investment Advisers The duty covers the whole relationship and includes an ongoing obligation to monitor your portfolio. In a discretionary account, that scope is especially broad because the adviser is making decisions continuously without checking in.
Broker-dealers operate under a different framework, the SEC’s Regulation Best Interest. Reg BI requires that recommendations serve your best interest at the time they are made, but it does not impose a general duty to monitor your account on an ongoing basis. The SEC has described Reg BI as a “specific and tailored approach” that recognizes it would be inappropriate to apply investment adviser obligations like ongoing monitoring to what is traditionally a transaction-based relationship.4SEC. Regulation Best Interest and the Investment Adviser Fiduciary Duty When a broker-dealer exercises discretionary authority, the line between transactional and advisory service blurs. If a broker-dealer is running your discretionary account, ask which standard applies and get the answer in writing.
Fees and Minimum Investments
Discretionary accounts typically charge an annual fee based on a percentage of assets under management. The industry median for human-managed advisory accounts runs around 1% of assets per year, though fees can run from roughly 0.25% for automated robo-adviser platforms to 1.50% or more for personalized management at a major wirehouse. At one large firm, the maximum advisory program fee ranges from 1.10% to 1.75% depending on the type of adviser and service level, with additional manager fees layered on for certain investment strategies.5Merrill Lynch Wealth Management. Explanation of Fees
The percentages sound small but compound. On a $500,000 account, a 1% annual fee costs $5,000 a year whether the account gains or loses money. Minimums vary too: some advisers accept $50,000, others require $250,000 or more. Before signing, request a complete fee schedule in writing and ask whether the fee covers all trading costs or whether commissions, ticket charges, or fund expense ratios come on top.
How Active Trading Affects Your Taxes
One consequence of a discretionary account that surprises people is the tax bill. Because the manager trades actively, the account may produce more short-term capital gains than a buy-and-hold approach would. The IRS treats gains on assets held for one year or less as short-term capital gains, taxed at your ordinary income rate. Assets held longer than a year qualify for lower long-term capital gains rates, which top out at 20% for high earners.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses
In a higher bracket, short-term gains can be taxed at roughly double the long-term rate. A manager focused on quarterly performance won’t necessarily optimize for your tax situation unless you raise it. Ask about tax-loss harvesting and holding-period awareness when you set your objectives.
Oversight and the Risk of Churning
Brokerage firms are required to establish supervisory systems covering every associated person’s activities, and discretionary accounts get extra scrutiny because the potential for abuse is higher.7FINRA.org. FINRA Rule 3110 – Supervision Supervisors review trade frequency, the types of assets being purchased, and whether the pattern matches the client’s stated objectives.
The biggest concern is churning: excessive trading meant to generate commissions rather than serve the client. Churning is easier to carry out in a discretionary account because the broker doesn’t need approval for each trade, so a run of unnecessary transactions can build before you notice. Under the FINRA Sanction Guidelines, penalties scale with the severity and scope of the misconduct, and individual brokers can face suspension or permanent bars from the industry.8FINRA. FINRA Sanction Guidelines
You aren’t in the dark, either. Under SEC rules, your broker must send you a written confirmation at or before the completion of each transaction, disclosing the security, the price, and the broker’s role in the trade.9eCFR. 17 CFR 240.10b-10 – Confirmation of Transactions For certain accounts, such as periodic investment plans or money market funds, the broker may substitute quarterly or monthly statements, but you must be notified of that arrangement in advance. Read the confirmations. Many cases of churning or unauthorized trading go undetected for months because the client never opened the envelope.
If you believe your account has been churned or mismanaged, FINRA operates an arbitration process for disputes between investors and brokerage firms.10FINRA.org. FINRA Arbitration Process Most brokerage agreements require arbitration rather than court litigation, so it is likely your primary avenue for recovery.
Ending the Arrangement
You can revoke discretionary authority at any time. The standard process involves submitting a written notice to the firm, and most advisory agreements specify a notice period, often around 30 days. Many agreements also include a short cooling-off window, sometimes five business days after signing, during which you can cancel without penalty.
To revoke, draft a clear written statement identifying the account, the manager, and the date of the original authorization, and send it to both the manager and the firm’s compliance department. Any trades initiated before the firm processes your revocation may still go through, so act promptly. Once revocation is complete, the account converts to a non-discretionary arrangement where the broker must obtain your approval before every trade. If you want to move the account to a different firm, that is a separate process under FINRA’s account transfer rules, but revoking discretion is the first step to regaining direct control.