Discretionary vs. Non-discretionary

A discretionary account is an account in which the broker has the authority to make trades on behalf of the client without obtaining prior approval for each trade. In other words, the broker has discretion to make trades without consulting the client.

While many firms prohibit their advisors from having discretionary accounts, this type of account is useful for clients who do not have the time or expertise to make their own trades, or who prefer to leave the decision-making to their broker. However, this type of account also comes with a higher level of risk, as the client is entrusting the broker with a significant degree of control over their investments.

On the other hand, a non-discretionary account is an account in which the broker does not have the authority to make trades without obtaining prior approval from the client. In this type of account, the client maintains control over their investments and must give explicit instructions to the broker for each trade. This type of account is useful for clients who want to have a more active role in managing their investments and who prefer to make their own trading decisions. However, it also comes with a higher level of responsibility, as the client must stay informed and make timely decisions about their investments.

In terms of practical effects, discretionary accounts can provide a level of convenience for clients who do not have the time or expertise to manage their own investments but also increase the risk of fraud or misconduct by the broker.

On the other hand, non-discretionary accounts are less risky in terms of fraud or misconduct by the broker, but the client must take on more responsibility for monitoring their investments and making timely decisions.

Both types of accounts have their advantages and disadvantages, and clients should carefully consider which type of account best suits their needs and risk tolerance.