# Discretionary Account: Definition, Examples, Pros & Cons

![Discretionary Account](https://www.investopedia.com/thmb/vHCi-bUc3P7W-n1fNBDdolsAXJU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Discretionary_Account_Final-b5cfcbfc371c40c1b29c75758dc2b450.png)

*— Investopedia / Candra Huff*

## What is a Discretionary Account?

A discretionary account is an investment account that allows an authorized [broker](https://www.investopedia.com/terms/b/broker.asp) to buy and sell securities without the client's consent for each trade. The client must sign a discretionary disclosure with the broker as documentation of the client's consent.

A discretionary account is sometimes referred to as a [managed account](https://www.investopedia.com/terms/m/managedaccount.asp); many brokerage houses require client minimums (such as $250,000) to be eligible for this service, and usually pay between 1 percent and 2 percent a year of assets under management ([AUM](https://www.investopedia.com/terms/a/aum.asp)) in fees.

### Key Takeaways

*   A discretionary account is one in which clients hand over control of their trading account to brokers or advisors, who select and execute trades for them.
*   ﻿Clients can customize such accounts by specifying restrictions or preferences for investing style or themes. In recent times, robo-advisers have also become popular instruments for discretionary accounts.
*   Advantages of discretionary accounts include quick execution of trades and expert services. Disadvantages of discretionary accounts include higher fees and the possibility of negative performance.

## Understanding Discretionary Accounts

Depending on the specific agreement between investor and broker, the broker may have a varying degree of latitude with a discretionary account. The client may set parameters regarding trading in the account.

For example, a client might only permit investments in [blue-chip](https://www.investopedia.com/terms/b/bluechip.asp) stocks. An investor who favors socially responsible investing may forbid the broker from investing in tobacco company stock or in companies with poor environmental records. An investor might instruct the broker to maintain a specific ratio of stocks to bonds but permit the broker freedom to invest within these asset classes as the broker sees fit. A broker managing a discretionary account is beholden to the express instructions and constraints (if any) spelled out by the client.

A new type of discretionary account comes from [robo-advisers](https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp) - automated investment management services carried out by algorithms with minimal human intervention. Robo-advisers typically follow passive indexed strategies that follow modern portfolio theory ([MPT](https://www.investopedia.com/terms/m/modernportfoliotheory.asp)), but may also be employed with user-instructed limitations such as to invest socially responsibly or to follow a specific investment strategy of their choice. Unlike traditional managed accounts, robo-advised accounts require very low minimum account balances (such as $5 or even $1) and charge very low fees (0.25 percent a year, or even no fee).

## Advantages and Disadvantages of Discretionary Accounts

The first advantage of a discretionary account is convenience. Assuming that the client trusts the broker's advice, providing the broker latitude to execute trades at will saves the client the time it takes to communicate with the broker before each potential trade. For a client who trusts his broker but is hesitant to hand the reins over in full, this is where setting parameters and guidelines comes into play.

Most brokers handle trades for a multitude of clients. On occasion, the broker becomes aware of a specific buying or selling opportunity beneficial to all his clients. If the broker has to contact clients one at a time before executing the trade, the trading activity for the first few clients could affect the pricing for the clients at the end of the list. With discretionary accounts, the broker can execute a large block trade for all clients, so all his clients will receive the same pricing.

Handing over trading of your account to a portfolio manager has its own set of risks. The first one relates to fees. Typically, discretionary accounts are more expensive as compared to non-discretionary accounts because they employ the services of a manager to handle your trades and manage risk. Fund managers and advisors are bound by [fiduciary rules](https://www.investopedia.com/terms/c/compliance-officer.asp) that make it necessary for them to act in their client's best interests. They charge fees on a quarterly or annual basis.

The second risk relates to performance. A [2015 study](https://www.ftadviser.com/2015/01/22/investments/discretionary-management/half-of-dfm-portfolios-failing-to-add-value-report-GboycflczNrsdMtFExWv3H/article.html) by Asset Risk Consultant (Arc) found that approximately 50 percent of asset portfolios had underperformed the market and generated negative returns. Only 20 percent had positive returns, known as [alpha](https://www.investopedia.com/terms/a/alpha.asp), while the rest were neutral with respect to the market.

## Discretionary Account Setup

The first step to setting up a discretionary account is finding a registered broker who offers this service. Depending on the brokerage house, an account minimum may be required to set up a discretionary account. For example, Fidelity offers three levels of managed accounts:  one with no minimum or a $25,000 minimum investment; and the other two require either a $50,000 minimum investment or $100,000 to $350,000 minimum investment.﻿﻿ The managed account levels with higher minimums offer broader menus of services and lower management fees.

> **Article Sources**
>
> 1.  Source: https://www.fidelity.com/managed-accounts/overview