A discretionary account is one in which the broker, adviser, or portfolio manager has been granted authority to make investment decisions — including what securities to buy or sell, in what amount, and at what price — without obtaining specific client approval for each transaction.
Requirements to establish a discretionary account: - Client must sign a written discretionary authorization (power of attorney over the account). - FINRA requires prompt review by a registered principal of all discretionary orders. - FINRA requires that the firm's policies designate who can exercise discretion.
Discretion vs. non-discretion: - Full discretion: Broker decides what, how much, and when. - Limited discretion (price/timing only): Client decides what and how much; broker only decides price and timing. Some firms treat price/timing authority as NOT requiring full discretionary authorization.
Regulatory requirements: - Excessive trading in a discretionary account = churning (a violation). - All discretionary accounts must be reviewed frequently for suitability and unusual activity. - RIA discretionary accounts: governed by the Advisers Act; fiduciary duty requires acting in the client's best interest.
Managed account programs (SMA/UMA): Many IA clients grant full discretion within a separately managed account structure with investment policy guidelines.
> Exam tip: Written authorization is required before the first discretionary order. Broker-dealers must have a principal review discretionary accounts promptly. "Churning" is the key violation risk in discretionary accounts.