Legal Definitions - discretionary account

A discretionary account is a type of financial account where the account holder (the client) grants a financial professional, such as a broker or investment advisor, the authority to make investment decisions and execute trades on their behalf without needing to obtain prior consent for each individual transaction.

This means the professional can buy and sell securities, commodities, or other investments using the client's funds based on their own judgment and expertise, as long as it aligns with the client's overall investment objectives and risk tolerance, which are typically established at the outset.

• Example 1: The Busy Executive

  Sarah is a highly successful CEO who travels frequently and has very little time to monitor daily stock market fluctuations. She wants her investments to grow but doesn't want to be bothered with approving every single trade. She opens a discretionary account with her trusted financial advisor. This arrangement allows her advisor to buy and sell stocks, bonds, and mutual funds on her behalf, using their professional judgment to capitalize on market opportunities, without needing to call Sarah for approval on each transaction. Sarah trusts her advisor to manage her portfolio according to her long-term financial goals.

• Example 2: Managing a Trust Fund

  A wealthy individual establishes a trust fund for their grandchildren, with a professional trustee (often a bank or investment firm) appointed to manage the assets. The trust agreement grants the trustee a discretionary account for the fund's investments. This empowers the trustee to make all necessary investment decisions—such as purchasing new assets or selling underperforming ones—based on their expertise and the trust's objectives, without needing to seek the beneficiaries' consent for each specific trade. This ensures the trust's portfolio is actively managed to meet its long-term financial goals for the grandchildren.

• Example 3: Retirement Planning for an Elderly Client

  Mr. Chen, an elderly retiree, finds managing his investment portfolio increasingly complex and stressful. He decides to hand over the day-to-day management to his financial planner. He sets up a discretionary account, giving his planner the authority to make all investment decisions, including buying and selling various securities, based on the planner's professional assessment of market conditions and Mr. Chen's retirement income needs. This arrangement allows Mr. Chen to relax, knowing his investments are being professionally managed without him having to approve every single transaction.