A Non-Discretionary Account is an investment account where the advisor must obtain client approval before executing any trades or transactions.
A Non-Discretionary Account refers to a type of investment account in which the financial advisor or portfolio manager is required to seek explicit client consent before making any buy or sell decisions. Unlike discretionary accounts, where the advisor has the autonomy to manage the portfolio within agreed parameters, a non-discretionary account requires client involvement for every transaction. This structure ensures that the account holder retains full control over investment decisions, maintaining direct oversight of portfolio changes. In wealth management, especially within family offices and among high-net-worth individuals, non-discretionary accounts are used when clients prefer to participate actively or wish to retain ultimate authority over their investments. This account setup is common in scenarios where clients have unique investment preferences, specific restrictions, or regulatory considerations. The advisor’s role is advisory and facilitative rather than autonomous, providing recommendations and executing trades solely upon the client’s direction.
The use of non-discretionary accounts impacts investment strategy by requiring more frequent communication and approvals between the advisor and client, which can lead to slower execution of investment actions. This structure fosters transparency and aligns investment activities closely with the client’s preferences and risk tolerance but may reduce the ability to capitalize on timely market opportunities. From a reporting standpoint, it ensures detailed records of client instructions and can help maintain compliance with fiduciary standards. Tax planning in non-discretionary accounts benefits from the client’s direct control, enabling personalized decisions that consider tax implications of each transaction. Governance is enhanced as clients retain decision-making authority, which can be critical in complex family office environments where consensus and control are prioritized. However, this also increases the administrative load on advisors and may require robust processes to manage approvals efficiently.
Consider a family office client who maintains a non-discretionary account with their wealth manager. The advisor suggests purchasing shares of a new technology stock. Before executing the trade, the advisor must contact the client, explain the recommendation, and receive explicit approval. If the client agrees, the advisor executes the trade; if not, no action is taken. This ensures the client retains full control over every portfolio decision.
Discretionary Account
A Discretionary Account grants the advisor or manager full authority to make investment decisions and execute trades without prior client approval, contrasting with the Non-Discretionary Account where client consent is mandatory for each transaction.
What distinguishes a non-discretionary account from a discretionary account?
In a non-discretionary account, the advisor must obtain the client’s approval for each trade or investment decision, whereas in a discretionary account, the advisor has the authority to act independently without seeking prior consent for each transaction.
Does a non-discretionary account limit the advisor’s ability to respond to market changes?
Yes, because the advisor must wait for client approval before executing trades, responding to market movements can be slower compared to discretionary accounts where the advisor can act immediately within agreed-upon guidelines.
Are non-discretionary accounts more suitable for certain types of clients?
Yes, non-discretionary accounts are better suited for clients who prefer active involvement in investment decisions, want to maintain direct control, or have specific restrictions or preferences that require personalized approvals.
