Understanding the Role of Discretionary Accounts in Investment Management
RP
Summary:
Discretionary accounts, also known as managed accounts, allow brokers to trade securities without client consent. They offer convenience but come with higher fees and performance risks. Understanding their setup and pros and cons is crucial for investors considering this option.
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What is a discretionary account?
A discretionary account is a type of investment account where an approved broker can make trades without getting the client’s permission first. This agreement is written down in a disclosure form that the client signs, letting the broker make business decisions on their behalf.
Understanding discretionary accounts
Client-broker agreement
When a client opens a discretionary account, they give their broker different levels of trade freedom. Clients can set rules or limits on the account, like their preferred investment style or tastes. For example, clients can say they want to invest in certain sectors or that they don’t want to invest in certain sectors because of social concerns.
Robo-advisers in discretionary accounts
As robo-advisors have become more popular, automatic investment management services have become common in accounts that people can choose to use. These platforms, which are run by algorithms, offer low-cost ways to trade with little help from people. Robo-advisors usually use passively indexed strategies, but clients can set their own limits, like only spending in socially responsible ways or certain investment strategies.
Discretionary account setup
Broker selection and account minimums
The first step in setting up a discretionary account is to choose a registered broker offering this service. Brokerage houses typically impose minimum account requirements for discretionary accounts, which may vary depending on the level of service desired. For instance, some brokers may offer managed accounts with no minimum balance requirements, while others may require minimum investments ranging from $25,000 to $350,000.
Frequently asked questions
What is the difference between discretionary and non-discretionary accounts?
In discretionary accounts, brokers have the authority to execute trades without client approval, whereas in non-discretionary accounts, clients must authorize each trade.
Are robo-advisers suitable for all investors?
While robo-advisers offer low-cost investment solutions, they may not be suitable for investors seeking personalized advice or complex investment strategies.
How can investors mitigate the risks associated with discretionary accounts?
Investors can mitigate risks by thoroughly researching and selecting reputable brokers, setting clear investment objectives and constraints, and regularly monitoring account performance.
Key takeaways
- Discretionary accounts allow brokers to trade securities without client consent, offering convenience but with higher fees.
- Clients can customize discretionary accounts with specific investment preferences and restrictions.
- Robo-advisers provide automated investment management services for discretionary accounts, offering low-cost solutions.
- Investors should carefully weigh the advantages and disadvantages of discretionary accounts and conduct thorough research before selecting a broker.
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