How much power does a limited discretionary account give a broker?

What are limited discretionary accounts?

A limited discretionary account is where a client allows a broker to buy and sell securities on his behalf. It works as a middle man between a non-discretionary and discretionary account where the broker can place specific trades without getting consent from the client. It is possible if the investor signs an agreement saying that he allows the broker to make these trades without consent. The terms can all be stated in the agreement. If the agreement says it is a non-discretionary account, it can also be one.

Some people refer to limited discretionary accounts as controlled accounts or managed accounts. It is a trading account directed by someone aside from the owner. Some call them managed accounts. They are investment accounts of individual investors, but professional money managers work them. Also, they are customized investment portfolios that meet the specific needs of the account owner. They are different from mutual funds that are professionally managed on behalf of multiple holders.

Let us say that the investor allows the broker to take action in transactions. They can rebalance the account to maintain the specified ratio of assets like stocks and bonds. However, as the name “limited discretionary account” name suggests, it can only do much. It cannot engage in any other types of trades on behalf of the investor or account holder.

What sets them apart from non-discretionary accounts?

Limited discretionary accounts give brokers the power to initiate some trades for the client. There is an agreement stating the client’s limitations. Hence, the client should fully trust the broker because this is risky. So, both the client and the broker should agree on the stated investment goals.

On the other hand, non-discretionary accounts allow brokers to execute the preferred action at the best price available. The broker oversees the non-discretionary account, and he can recommend some trades to the client. Of course, this is still subject to the exact relationship between the broker and the client. But all in all, the brokers do not have the legal authority to make transactions like buying or selling securities without the client’s consent. This is what sets non-discretionary accounts apart from limited discretionary accounts.

Why should I use a limited discretionary account?

If you are a busy person invested in trading, you might want to check the arrangements that a limited discretionary account can offer. It will keep you updated on the daily developments of the market. It also allows you to invest without spending too much time on the activity. You can get the best of the broker’s knowledge and experience regarding investments.

While we are saying this, some people think otherwise and prefer non-discretionary accounts more. Investors can be hands-on on their accounts, so they do not depend on the broker too much. They also do not have to worry about trusting the broker too much. If you need advice from professionals but want to do most of the work, this might be a good idea.