Discretionary Account

A discretionary account is a type of investment account that allows a broker or financial advisor to make decisions and transactions on behalf of the investor without requiring the investor’s direct approval for each transaction. This type of account can offer various advantages for investors, particularly those who lack the time, expertise, or desire to manage their investments actively. In this comprehensive overview, we will explore the concept of discretionary accounts, how they work, their benefits and risks, the process of setting up such an account, and examples of companies that offer discretionary account services.

How Discretionary Accounts Work

Authorization and Control

When an investor sets up a discretionary account, they grant specific authorization to their broker or financial advisor to manage the account. This authorization is usually formalized through a power of attorney document. The level of discretion can vary, but it typically includes decisions related to buying and selling securities, asset allocation, and investment strategy.

Decision-Making Process

The broker or financial advisor uses their expertise and judgment to make investment decisions that align with the investor’s financial goals, risk tolerance, and investment horizon. They conduct research, analyze market trends, and execute trades accordingly. The investor may still receive periodic reports and summaries of account activity, but day-to-day decisions are handled by the designated professional.

Fee Structure

Discretionary accounts often involve a fee structure based on assets under management (AUM) or a flat fee for services rendered. Some providers may also charge performance-based fees, where the advisor earns a higher fee if the account performs well relative to a benchmark.

Benefits of Discretionary Accounts

Professional Management

One of the primary benefits of discretionary accounts is the access to professional investment management. Investors can leverage the expertise of experienced financial advisors who have in-depth knowledge of markets and investment strategies.

Time Efficiency

Discretionary accounts save time for investors who may not have the availability to monitor their investments continually. The advisor takes on the responsibility of tracking market conditions and making timely decisions.

Customization

Financial advisors can tailor investment strategies to the specific needs and preferences of the investor. This customization can include considerations such as risk tolerance, time horizon, liquidity needs, and ethical or environmental preferences.

Timely Decision Making

In fast-moving markets, the ability to act quickly can be crucial. Discretionary accounts allow advisors to make prompt decisions without waiting for investor approval, potentially capitalizing on fleeting opportunities.

Reduced Emotional Decision-Making

Investors often make emotional decisions that can negatively impact their portfolios. By delegating decision-making authority to an advisor, the risk of emotional trading is minimized.

Risks of Discretionary Accounts

Trust and Transparency

Since the investor grants significant control to the advisor, trust is essential. There is a potential risk of misalignment between the investor’s interests and the advisor’s decisions. Therefore, transparency and regular communication are crucial to mitigate this risk.

Fee Structures

The fee structure associated with discretionary accounts can be higher than other types of accounts due to the professional management provided. Investors need to assess whether the potential benefits outweigh the costs.

Overtrading

There is a risk of overtrading, where the advisor engages in excessive buying and selling, potentially leading to increased transaction costs and tax implications. Regulatory bodies often monitor this to protect investors.

Performance Risks

Even with professional management, there is no guarantee of positive investment performance. Market conditions and economic factors can still lead to losses.

Setting Up a Discretionary Account

Selecting a Broker or Advisor

Choosing the right broker or advisor is crucial when setting up a discretionary account. Investors should consider factors such as the advisor’s experience, track record, investment philosophy, and fees. Reputable firms typically offer thorough background information on their advisors.

Agreement and Documentation

Once an advisor is selected, the investor will enter into a discretionary account agreement. This document outlines the terms of the relationship, the level of discretion granted, the fee structure, and other essential details. A power of attorney form is typically included to legally enable the advisor to act on behalf of the investor.

Defining Investment Objectives

The investor and advisor will work together to define the investment objectives, risk tolerance, and specific preferences. This process often includes a detailed questionnaire and consultation to ensure the advisor fully understands the investor’s goals.

Ongoing Monitoring and Communication

After the account is established, regular communication between the investor and advisor is vital. Periodic reviews, performance reports, and strategy discussions help ensure that the investment approach remains aligned with the investor’s objectives.

Examples of Companies Offering Discretionary Account Services

Morgan Stanley

Morgan Stanley offers a range of discretionary account services through its wealth management division. Their team of experienced financial advisors provides customized investment strategies tailored to the unique goals and preferences of each client. More information can be found on their website.

Charles Schwab

Charles Schwab provides discretionary account management through its Personalized Portfolio Management services. Clients can benefit from expert advice and tailored investment strategies to meet their financial objectives. Details are available on their website.

UBS

UBS offers discretionary portfolio management, allowing clients to delegate investment decisions to experienced professionals. Their services are designed to align with the individual goals and risk profiles of their clients. Further information can be found on their website.

Goldman Sachs

Goldman Sachs offers discretionary account management through its Private Wealth Management division. Clients receive personalized investment strategies and professional management to achieve their financial goals. More about their services is available on their website.

Merrill Lynch

Merrill Lynch, a division of Bank of America, provides discretionary portfolio management through its team of dedicated financial advisors. They offer customized solutions to help clients grow and preserve their wealth. Additional details can be found on their website.

Conclusion

Discretionary accounts offer a valuable solution for investors seeking professional management and tailored investment strategies without the need for day-to-day involvement. By granting control to experienced advisors, investors can benefit from timely decision-making, reduced emotional trading, and customized portfolio management. However, it is essential to carefully select a trustworthy advisor, understand the fee structure, and maintain transparency and communication to maximize the benefits and mitigate potential risks.