Discretionary account

A discretionary account involves an agreement in which the account owner gives a broker representative authority to make judgment calls on securities transactions. Under such an agreement, the account owner or customer allows his representative to purchase or sell securities without having to contact him to ask for approval. The customer therefore signifies his confidence in the expertise and wisdom of his representative by putting his agreement to this arrangement in writing. However, while some discretionary accounts give the representative absolute freedom to exercise his judgment, other agreements may also stipulate some exceptions or restrictions which limit the representative’s authority.

Since entering into such an agreement exposes the investor to a lot of risks, this is usually done only when the broker or brokerage house has already gained the confidence of the investor. The investor may not be present or may not have the time to manage his investments, so he may find that working with a trusted representative is the most manageable way of handling his securities. Of course, as the owner of the account, the investor reserves the right to make add or revoke privileges as he sees fit. He may also decide to remove the representative from the equation, should he be dissatisfied with the outcome of the arrangement.

While most investors who opt for discretionary accounts are likely to choose a recognized broker with a good track record, it is still important that every investor does a reasonable amount of research on the investing process as well as the kinds of securities he wishes to focus on. He must also know what his objectives are and have an idea of the types of securities he may want to buy or sell in the future. By working as closely as possible with his broker, an investor can minimize the risks attached to discretionary accounts.

Discretionary accounts may alternatively be referred to as managed accounts or controlled accounts.

Leave a response

Leave a Response