Investment discretion is the written legal authority that lets a financial professional buy and sell securities in your account without getting your approval before each trade. A manager with discretionary authority decides what to buy, when to buy it, and how much to invest, working within the goals and risk limits you agreed on in advance. The arrangement saves you the back-and-forth of approving every trade and lets your portfolio respond quickly to the market, but it also hands real control to someone else, which is why the paperwork, duties, and oversight around it are heavier than for a regular brokerage account.
What Discretionary Authority Actually Covers
The SEC’s Form ADV instructions define the term plainly: a firm has discretionary authority “if it has the authority to decide which securities to purchase and sell for the client.”1U.S. Securities and Exchange Commission. Form ADV Instructions In practice, that authority covers three decisions: what security to trade, how much of it, and when to execute.
In a non-discretionary account, your adviser calls with a recommendation, you say yes or no, and only then does the trade go through. A discretionary account skips that step. Your manager sees an opportunity or a risk, acts on it, and you see the result on your next statement. You still own everything in the account; nothing transfers to the manager. What transfers is the day-to-day decision-making.
That transfer is why regulators treat discretionary accounts differently. The documentation, fiduciary duties, and disclosure requirements described below exist because you have handed over real control, and the law treats that handoff as something more than an ordinary brokerage relationship.
Time and Price Discretion: The Narrow Exception
Not every piece of trading judgment counts as full discretion. FINRA Rule 3260 recognizes a limited exception called “time and price” discretion. If you tell a broker to buy 200 shares of a specific stock but leave the precise execution price and timing to them, that narrow authority does not require formal discretionary paperwork.2FINRA. FINRA Rules – 3260 Discretionary Accounts
The authority expires at the end of the business day you granted it, unless you sign a specific written instruction extending it. For institutional accounts operating under “not-held” good-till-cancelled orders, the end-of-day limit does not apply. Any use of time and price discretion still has to be documented on the order ticket.
Anything beyond price and timing is a different animal. If the broker is picking the security itself or deciding how many shares to buy, that is full discretion and triggers everything that follows.
What You Sign to Grant Investment Discretion
Setting up a discretionary account takes more than a verbal okay. The foundation is a written investment advisory contract between you and the advisory firm, laying out services and fees. Every registered adviser has to execute this contract with each client.3North American Securities Administrators Association. Compliance Matters – Best Practices for Investment Advisory Contract Terms If your account sits at a brokerage firm rather than a registered investment adviser, FINRA Rule 3260 requires that you give prior written authorization to a named individual and that the firm formally accept the account in writing through a designated partner, officer, or manager.2FINRA. FINRA Rules – 3260 Discretionary Accounts
Most custodians also want a limited power of attorney or trading authorization form. This gives the manager authority to enter trades but does not let them withdraw funds or move assets to themselves. You list the specific account numbers covered, name the authorized individual, and choose the scope of authority: full discretion or limited trading only.
Who Is Actually Managing the Money
You are entitled to know, by name, who is making decisions. SEC rules require advisory firms to prepare a brochure supplement, Form ADV Part 2B, for any supervised person with discretionary authority over your assets, even if that person never speaks with you directly.4U.S. Securities and Exchange Commission. Form ADV Part 2 Instructions If a team of more than five people manages your account, the firm has to provide supplements for the five with the most significant day-to-day responsibility.
These supplements must disclose educational background, five years of professional history, any disciplinary history, outside business activities, and additional compensation such as sales awards. They also have to explain how the firm supervises that person and name who is responsible for oversight. Read it. A manager carrying disciplinary history or heavy outside commitments is worth a second look.
The Investment Policy Statement
Alongside the legal paperwork, most relationships include an Investment Policy Statement, or IPS, that sets the guardrails for how your money can be managed. The IPS defines your risk tolerance, target asset allocation, any restrictions on specific investments, and your overall financial goals. It is the rulebook your manager has to follow while operating with discretion.
The IPS matters because it creates accountability. If you specified a conservative allocation and your manager loaded the account with speculative positions, the IPS is the document that proves they went off course. An adviser cannot legally ignore those boundaries, and doing so can be a breach of both contract and fiduciary duty.
The Duties Your Adviser Owes You
Granting discretion comes with a built-in legal safeguard: the fiduciary standard. Under the Investment Advisers Act of 1940, registered investment advisers owe you two duties, which the SEC’s 2019 fiduciary interpretation spells out as a duty of care and a duty of loyalty.5U.S. Securities and Exchange Commission. Commission Interpretation Regarding Standard of Conduct for Investment Advisers
The duty of loyalty means your adviser cannot put their own interests ahead of yours. No steering trades to generate extra commissions, no selling you securities from their own inventory at an undisclosed markup, no conflicts they haven’t told you about. The duty of care means they have to act with the skill and diligence of a competent professional, including a reasonable investigation of investments before putting your money into them.
These are enforceable obligations. Violations can lead to regulatory sanctions, civil liability, and disgorgement of profits. When a manager steps outside your IPS or trades in ways that benefit themselves at your expense, those actions expose them to SEC enforcement and private lawsuits.
If Your Account Sits at a Broker-Dealer
A discretionary account held at a broker-dealer rather than a registered investment adviser operates under a slightly different framework. Broker-dealers are subject to Regulation Best Interest instead of the full Advisers Act fiduciary standard. SEC staff have noted that the two standards “generally yield substantially similar results in terms of the ultimate responsibilities owed to retail investors,” though the triggers differ.6U.S. Securities and Exchange Commission. Staff Bulletin – Standards of Conduct for Broker-Dealers and Investment Advisers Care Obligations The adviser fiduciary duty is ongoing and covers the whole relationship; Reg BI focuses on the point of recommendation. Discretionary authority at a broker-dealer also triggers FINRA’s requirement that the firm review discretionary accounts frequently to catch trades that are excessive in size or frequency.2FINRA. FINRA Rules – 3260 Discretionary Accounts
What Discretionary Management Costs
Discretionary accounts almost always run on an asset-based fee rather than per-trade commissions. The median annual fee for a human adviser is roughly 1% of assets under management, with rates as low as 0.30% for larger accounts and as high as 2% at some firms. Robo-advisors offering automated discretionary management typically charge between 0.25% and 0.50%. The asset-based model aligns incentives: your manager’s fee grows only when your portfolio grows. On a large account, though, even a 1% fee compounds into serious money over time.
Some advisers charge performance-based fees, taking a cut of profits above a benchmark. Federal rules limit who can be charged this way. For 2026, you have to have at least $1,400,000 in assets under management with the adviser, or a net worth of at least $2,700,000, to qualify as a “qualified client” eligible for performance fees. Both thresholds were adjusted upward from $1,100,000 and $2,200,000 to account for inflation.7U.S. Securities and Exchange Commission. Performance-Based Investment Advisory Fees
Taxes are the other side of the ledger. A skilled manager can harvest losses, time sales to qualify for long-term capital gains rates, and place tax-inefficient holdings in retirement accounts. A high-turnover strategy in a taxable account does the opposite: short-term gains taxed at your ordinary income rate quietly eat into returns. If your manager trades frequently, ask whether those assets would be better held in an IRA, 401(k), or similar account where gains compound tax-deferred.
Checking the Account and Watching for Red Flags
Giving someone discretion is not an excuse to stop looking. Reviewing statements monthly is the single most effective way to catch problems early. Warning signs include:
- Securities you don’t recognize or positions that don’t fit your stated goals.
- High trading frequency, which generates transaction costs that eat into returns. This practice is known as churning.
- Account swings that seem out of proportion to your risk tolerance or to market conditions.
- Concentrated positions, speculative instruments, or asset classes your IPS does not authorize.
Churning is one of the more common abuses in discretionary accounts. It means excessive buying and selling primarily to generate fees or commissions rather than to help the client. FINRA requires firms to review discretionary accounts at frequent intervals specifically to detect transactions that are excessive in size or frequency relative to the account’s resources.2FINRA. FINRA Rules – 3260 Discretionary Accounts
You should also receive an updated Form ADV brochure from the firm each year, and you can look up any firm’s filing in the SEC’s Investment Adviser Public Disclosure database at any time.1U.S. Securities and Exchange Commission. Form ADV Instructions
Taking Discretionary Authority Back
You can revoke discretionary authority at any time. This is your account and your money, and the power you granted can be withdrawn. The process usually means submitting written notice to both your adviser and the custodian holding your assets. Most advisory contracts specify a notice period or termination process, and NASAA recommends that advisers make sure their termination and refund policies are clearly stated in the contract and consistent with the firm’s brochure.3North American Securities Administrators Association. Compliance Matters – Best Practices for Investment Advisory Contract Terms
Check your contract for any provisions about what happens if you become incapacitated or pass away. If the agreement lets the adviser continue managing assets after death or incapacity, it should also let your executor or emergency contact terminate the arrangement through written notice. Contracts missing that provision deserve scrutiny.
Once you revoke authority, the account typically converts to a non-discretionary arrangement, where the manager has to get your approval before every trade. You can also move the account to another firm entirely. If you believe misconduct has occurred, consider requesting that all trading stop immediately while you work through your options.
If Something Goes Wrong
If a discretionary manager has traded outside the scope of your authorization, churned your account, or otherwise breached their fiduciary duty, the primary route to recovery is FINRA arbitration. Most brokerage and advisory agreements include mandatory arbitration clauses, and FINRA’s process is generally faster and less expensive than traditional litigation.8FINRA. Arbitration and Mediation
FINRA arbitration has a six-year eligibility window. No claim can proceed if more than six years have passed since the event that gave rise to the dispute. That is why regular monitoring matters: the earlier you catch a problem, the more options you keep.
Beyond arbitration, you can file a complaint with FINRA’s Investor Complaint Center if you suspect fraud or misconduct. You can also submit complaints to the SEC or your state securities regulator. These routes don’t directly recover money for you, but they trigger investigations that can lead to enforcement actions, fines, and, in serious cases, the manager being barred from the industry. If losses are substantial, talking to a securities attorney before choosing between arbitration and regulatory complaints is time well spent.