Many investors wonder about the differences between discretionary and non-discretionary investment accounts or do not even realize that there are two types of such accounts that function quite differently from each other. Simply put, a discretionary account is one in which a broker makes trades, buying or selling securities, in an investor’s account without the investor’s approval. A non-discretionary account is one in which the investor decides on what trades to make. In these accounts, brokers act as a facilitator; they merely receive and execute the clients requested trades, attempting to get the best prices possible for the investor. Brokers managing these accounts still make recommendations on what to sell, what to purchase, and when. They cannot, however, make any such trades without getting prior approval from the investor.
Even still, choosing between the two can be a difficult decision. Both have pros and cons. Say, for instance, a broker has a hundred clients with non-discretionary accounts and each of them holds a particular investment in their account. If the market makes a sudden shift for the worse, the broker has to contact each of the clients to acquire approval to sell. This could be devastating in such a situation that requires swift action.
For investors with discretionary accounts, advisors can take action on information more quickly and efficiently, selling positions out of all their accounts in a single, cost-effective transaction. Similarly, the broker is in a better position to pounce on purchasing opportunities. As markets drop and a good stock unexpectedly drops in value, the broker can act quickly.
For some investors though, discretionary accounts are not suitable. These investors prefer a more hands-on approach with their investment accounts and enjoy participating in the decision-making process. Others have such complicated restraints on their accounts that limit the possibility of the account being discretionary.
In both account types, the broker is required to make decisions that are suitable for the investor’s needs, particularly with regard to the investor’s stated investment objectives and risk tolerance. When brokers fail to meet this standard, it can have devastating effects on the investor who may suffer significant financial losses.
Protecting Your Investments from Broker Misconduct
Whether you choose a discretionary or non-discretionary investment account, your broker has a legal duty to act in your best interests and make only suitable recommendations. When that trust is broken may it be through negligence, self-dealing, or unsuitable trades, the financial consequences can be severe. At The Frankowski Firm, we have the knowledge and experience to hold brokers and firms accountable for misconduct, recovering losses for investors nationwide. If you believe your account has been mishandled or your broker has failed to uphold their obligations, contact us today or call 888.741.7503 for a confidential consultation. We will evaluate your case, explain your legal options, and fight to protect your rights and investments.