Monday, August 7, 2017

The Discretionary Account

There are two general types of investments accounts: Non-discretionary and discretionary. A non-discretionary account requires the representative to obtain client consent before he/she makes any investment decisions. With discretionary accounts, investors delegate day-to-day investment decisions to their portfolio manager (PM). That differs from non-discretionary accounts where clients must make final trading decisions on each transaction.

Because a discretionary account allows a dealer representative to make account transactions without the client’s prior approval, a common law fiduciary duty will virtually always arise with such an account. A fiduciary duty may also arise where the client has a non-discretionary account depending on the actual power or influence that the representative or dealer has over the client, and the extent to which the client relies on the representative or dealer.

Discretionary accounts are suitable for investors, such as busy executives, business owners and others who don’t want to be involved with portfolio management. These accounts are most suitable for investors who prefer a balanced approach to investing and have a long time horizon. Discretionary accounts usually have higher minimum investment requirements, often starting at $250,000. Fees are usually based on assets under administration, which at least in principle, motivates portfolio managers to perform well because their fees are linked to portfolio performance. Do not hesitate to negotiate fees. Fees are generally tax deductible in non-registered accounts.

In a fast-paced financial world, delegation can make a difference. Consider an advisor with a 150 clients in non-discretionary accounts, each holding a particular stock. Should the markets take a turn for the worse or the company post unfavourable results, the representative must contact each of those clients for approval to sell the position. This can be a serious disadvantage when a situation warrants immediate action. A good PM can take emotion out of the equation by making the decision for the client in a timely manner.

Likewise, the PM is better positioned to seize buying opportunities. When the markets dip and a good quality stock inexplicably drops in value, he or she can again act immediately.

Portfolio managers use different investment management approaches and styles. Some managers are product specialists, some adopt a certain style such as value, growth or momentum, and some offer a combination of products and styles.

As with any account, the PM will need to know your KYC parameters such as net worth, time horizon and risk profile (tolerance and loss capacity) and your investment objectives.

The PM doesn’t invest without restriction, but is bound by the parameters outlined in a jointly developed Investment Policy Statement. Investors may even establish constraints based on such things as personal principles and specify stocks to avoid from industries they feel are socially undesirable. You can instruct your personal PM that you don't want to invest in booze companies, or you don't want to go near junk bonds, or that you want half of your holding always in GIC’s .The investor has more peace of mind knowing that discretionary accounts are subject to greater governance and oversight .

But for some investors, discretionary accounts aren’t suitable. Passive Investment management strategies, which are characterized by low portfolio turnover, are generally more compatible with non-discretionary accounts. The same would be true of a “buy-and-hold” strategy. The fewer the trades, the less client meetings or phone calls necessary to gain authorization to execute transactions. Clients who like to be hands-on with their investments will also be better served by a non-discretionary account.

The qualifications to be a portfolio manager require higher levels of education and experience than other advisors. However, when choosing a portfolio manager, investors should seek even more distinctions, including access to high quality research and freedom from any influence toward proprietary products. The PM should have a clear communications plan and be readily available to answer clients’ questions. Above all, you need to be able to trust your PM and the dealer. You can check registration and disciplinary history at

Here's some questions to ask before signing up for a discretionary account:

        ·         What services are provided?

·         What are all the fees and expenses associated with such an account? Obtain in dollars and percentage terms.

·         Are you a fiduciary? If yes, obtain confirmation in writing, If no, reconsider this type of account. See this sample fiduciary form from the Small Investor Protection Association

·         What are your qualifications and experience?

·         Can I see a sample Investment Policy Statement?

·         How do you manage cash in the account?

·         What is your trading strategy? Expected portfolio turnover?

·         How do you effect tax optimization?

·         Have you ever been sanctioned or disciplined by a regulator?

·         Can you supply references?

·         What information and reports will I receive? On what frequency?

·         Can I access my account online?

·         What is the complaint process in the event of a dispute? Is OBSI available?

If your account is not discretionary and your advisor has been making trades in your account without your permission, contact the Compliance department of your investment firm right away and document your complaint. If you are not satisfied with the response of the Compliance department contact your provincial securities regulator for more information about your options and where to go for help.
Be sure to take the time necessary to review carefully all the information when filling out the applicable account forms. And do not sign them unless you thoroughly understand and agree with the terms and conditions and fees they impose on you.


Information contained herein is obtained from sources believed to be reliable, but the accuracy is not guaranteed. The material does not constitute a recommendation to buy, hold or sell. The purpose of this Document and others in the series is to educate investors by bringing together personal finance information from a variety of sources. It is not intended to provide legal, investment, accounting or tax advice and should not be relied upon in that regard. If legal or investment advice or other professional assistance is needed, the services of a competent professional should be obtained.

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