Discretionary accounts

A discretionary account gives a financial professional trading authority over an account. If you don’t have the time or knowledge to manage your own brokerage account, you can give your broker power of attorney (POA), which allows them to make investment decisions on your behalf. When a firm has POA over a customer’s account, it can place trades without getting the customer’s approval for each transaction.

In order for the firm and/or broker to make suitable decisions, customers must answer all suitability questions posed by the firm. If you recall, suitability questions (like net worth and annual income) are voluntary for customers to answer. However, if they are unanswered, the customer cannot be provided with recommendations. The same rule applies to discretionary accounts.

A discretionary account is a type of fiduciary account. A fiduciary is a third party who oversees another person’s assets. Fiduciaries must put their client’s interests before their own and act in the client’s best interest.

Discretionary accounts come with added supervision because of the authority they give financial professionals. If your broker has POA on your account, they have significant control over your financial assets. For that reason:

• All trades placed on behalf of customers must be marked as “discretionary.”
• These trades must be reviewed more frequently by principals (supervisors).
• All discretionary trades must be reviewed promptly after being submitted.

A discretionary order is one where the financial professional makes a decision for the customer about any of the following:

• Asset: what security is being bought or sold

• Action: whether the security is being bought or sold

• Amount: how many shares or units are being bought or sold

Many people remember this as the “AAA” rule. If the financial professional chooses the asset, action, or amount for a trade, the order is considered discretionary and requires a POA to be submitted.

Sometimes, a financial professional can make certain choices for a customer without the trade being considered discretionary. Both of the following can be decided without POA or discretionary status:

• Price of the security

• Time of the trade

A financial professional can choose the price and/or time of a transaction without the trade being considered discretionary. However, to keep its non-discretionary status, the trade must be completed within one day. If it takes more than one day to complete, the order reverts back to discretionary status and requires a POA.

Discretionary accounts are usually marketed to customers as “wrap” accounts. These accounts bundle a set of services, typically including asset management and general account maintenance. Instead of paying separate service fees and trade commissions, wrap accounts have those costs “wrapped” into one fee.

Wrap account fees are usually charged as assets under management (AUM) fees. For example, a customer with a $100,000 account would pay an annual fee of $1,000 if their wrap account fee was 1% of AUM.

Wrap accounts are considered investment advisory products and require financial professionals to be properly licensed as investment adviser representatives in order to sell them. This typically involves passing the Series 65 or Series 66 exams.