Key Takeaways
- Broker trades without client approval per guidelines.
- Requires written consent or power of attorney.
- Enables quick market response and trade execution.
- Carries risk of unauthorized or misaligned trades.
What is With Discretion?
"With discretion" refers to a trading instruction allowing a broker or investment manager to execute trades on your behalf without obtaining your approval for each transaction. This authority typically operates within predefined guidelines, such as an Investment Policy Statement (IPS), ensuring trades align with your objectives and risk tolerance.
This approach contrasts with non-discretionary accounts where every trade requires your explicit consent. Discretionary orders may also involve specific price flexibility, such as a limit order with a discretionary amount, enabling faster execution without revealing the full price range to the market.
Key Characteristics
Discretionary trading empowers brokers with flexibility while maintaining client protections. Key points include:
- Authorization: Requires written consent or power of attorney to define the broker's scope and strategy.
- Trade Elements Controlled: Brokers decide asset, action, and quantity based on market conditions within agreed limits.
- Fiduciary Duty: Brokers must act in your best interest, adhering to regulatory oversight.
- Execution Speed: Enables rapid responses to market opportunities, avoiding delays common in non-discretionary trades.
- Use in Complex Orders: Sometimes combined with iceberg orders or executed in venues like a dark pool to minimize market impact.
How It Works
When you grant discretion, your investment advisor creates an IPS detailing your goals and limits, then receives legal authorization to trade independently. This allows the broker to swiftly buy or sell securities as market conditions change, marking trades as discretionary for compliance reviews.
Discretionary accounts often appear in wrap fee programs, combining management and trading costs into one. Brokers monitor markets to optimize timing and pricing, sometimes using tactical asset allocation to adjust your portfolio dynamically without requiring your direct input for each move.
Examples and Use Cases
Discretionary trading suits investors who prefer professional management and faster execution. Common scenarios include:
- Airlines: Purchasing shares of Delta or American Airlines during market dips without delay to capitalize on price movements.
- Large Orders: Breaking up big trades in companies like UBS to avoid inflating prices, executed discreetly over time.
- Index Funds: Using discretionary authority to rebalance portfolios with low-cost index funds efficiently.
- Broker Selection: Choosing among best online brokers who offer discretionary account services with robust oversight.
Important Considerations
Granting discretion requires trust and clear communication. Ensure your IPS is comprehensive and regularly reviewed to confirm trades align with your goals. Ongoing monitoring is crucial since discretionary accounts may involve higher fees and increased risk of unauthorized activity.
Always maintain access to detailed statements and discuss any unexpected trades with your advisor promptly. Understanding the balance between flexibility and control helps you maximize the benefits of discretionary trading while managing potential drawbacks effectively.
Final Words
Discretionary orders allow for faster, more flexible trade execution aligned with your investment goals and risk tolerance. To make the most of this approach, review your investment policy statement carefully and discuss the scope of discretion with your broker before granting authorization.
Frequently Asked Questions
'With discretion' refers to an order where a broker or investment manager can execute trades on behalf of a client without needing prior approval for each transaction, operating within predefined guidelines like an Investment Policy Statement.
A discretionary order allows the broker to decide trade details such as asset, amount, and timing independently, while a non-discretionary order requires the client's approval for every trade, which can slow down execution during volatile markets.
Clients must provide written consent or a power of attorney that outlines the broker’s authority, strategy, and limits, ensuring that all trades align with the client’s best interests and investment objectives.
Discretionary orders enable rapid response to market opportunities, help avoid market impact from large trades by splitting orders, and save time for clients by leveraging the advisor’s expertise in managing investments.
Risks include the possibility of unauthorized or misaligned trades and generally higher fees, which makes ongoing monitoring and clear communication between client and advisor essential.
A limit order with discretion allows the broker to execute the trade within a price range around the limit price—such as buying at $50 with a $1 discretionary range—giving flexibility on timing and price while only showing the original limit to the market.
They operate under an Investment Policy Statement and fiduciary duties, with trades subject to principal review and firm oversight to ensure adherence to the client’s risk tolerance and investment objectives.
Discretion is particularly valuable when executing large orders to avoid price spikes, or during volatile market conditions, allowing the broker to act quickly on opportunities without waiting for client approval each time.
