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What is a Discretionary Account? A Comprehensive Legal Overview
Definition & Meaning
A discretionary account is a type of trading account that allows a broker to make investment decisions on behalf of the client without needing to obtain prior approval for each transaction. This arrangement is based on a general authorization from the client, which can take the form of a written agreement or a power of attorney. In essence, the broker has the authority to buy or sell securities or commodities as they see fit, aiming to manage the account in the client's best interest.
Table of content
Legal Use & context
Discretionary accounts are commonly used in the fields of finance and investment. They are particularly relevant in securities trading and commodity markets. Clients who open discretionary accounts typically do so because they prefer to delegate investment decisions to a professional broker or advisor. This can be beneficial for individuals who may not have the time or expertise to manage their investments actively. Users can manage their discretionary accounts with the help of legal templates from US Legal Forms to ensure compliance with relevant regulations.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A retiree opens a discretionary account with a brokerage firm, allowing the broker to manage their investments without needing to consult the retiree for each trade. The broker invests in a diversified portfolio based on the retiree's risk tolerance and financial goals.
Example 2: A busy professional grants a financial advisor discretionary authority to manage their investment portfolio. The advisor makes trades based on market conditions and the client's long-term strategy, ensuring the portfolio grows over time. (hypothetical example)
Comparison with related terms
Term
Description
Key Differences
Discretionary Account
Account where the broker makes trades without client consent.
Client authorizes broker to act on their behalf.
Non-Discretionary Account
Account where the broker must obtain client approval before trades.
Client retains control over each transaction.
Managed Account
Account managed by a professional, similar to a discretionary account.
May involve more oversight and communication with the client.
Common misunderstandings
What to do if this term applies to you
If you are considering opening a discretionary account, it is essential to understand the implications of granting authority to a broker. Review the terms of the agreement carefully and ensure that it aligns with your investment goals. You may want to explore legal form templates available through US Legal Forms to assist in setting up your account properly. If you have complex financial needs, consulting a financial advisor or legal professional is advisable.
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Typical Fees: Varies by brokerage; may include management fees.
Jurisdiction: Governed by state and federal securities laws.
Possible Penalties: Mismanagement or failure to act in the client's best interest can lead to legal action against the broker.
Key takeaways
Frequently asked questions
A discretionary account is a trading account where the broker has the authority to make investment decisions without obtaining prior consent from the client for each transaction.
In a discretionary account, the broker can trade without client approval, while in a non-discretionary account, the broker must get the client's consent for each trade.
Consider your investment goals, risk tolerance, and the level of trust you have in the broker managing your account.
Yes, you can revoke the authorization at any time, but you should notify your broker in writing.
Yes, the primary risk is that the broker may make decisions that do not align with your expectations or investment goals.