What Is a Non-Discretionary Account?

Investment accounts allow individuals to buy, sell, and hold various assets to grow wealth. These accounts vary significantly, primarily distinguished by who holds the authority to make investment decisions and execute trades. This distinction dictates the level of involvement and control an investor maintains over their portfolio.

Defining Non-Discretionary Accounts

A non-discretionary account is characterized by the account holder retaining complete control over all investment decisions and trade executions. This means that a financial advisor or broker, while providing recommendations, cannot initiate any trades without the client’s explicit approval for each transaction. For example, if a broker identifies a promising stock, they must contact the client and receive permission before buying or selling any shares. The broker’s role is strictly limited to executing the client’s specific instructions, acting as a facilitator rather than an independent decision-maker.

Client Authority and Advisor’s Role

In a non-discretionary account, the client’s full control extends to researching potential investments, deciding which assets to buy or sell, and issuing precise instructions for each trade. For instance, a client might instruct their broker to “buy 100 shares of XYZ company at a limit price of $50.” The client is actively involved in monitoring their investments and making timely choices. Conversely, the advisor’s role is to execute these instructions promptly and accurately, ensuring the best possible price for the client’s trades. This clear division of responsibility means the advisor acts solely as an agent for the client’s specific directives.

Non-Discretionary vs. Discretionary Accounts

The primary distinction between non-discretionary and discretionary accounts lies in who holds the authority to make investment decisions and execute trades. In a discretionary account, the client grants the advisor prior written authorization to make investment decisions and execute trades without seeking approval for each transaction. This authority is typically formalized through an agreement, allowing the advisor to act on market opportunities more swiftly. Conversely, a non-discretionary account mandates that the client’s explicit permission is obtained for every single trade. This means the client must approve each buy or sell order before it is placed, directly contrasting with the advisor’s independent trading power in a discretionary setting.

Suitability for Investors

A non-discretionary account is generally suitable for investors who prefer to be actively involved in managing their investments. These individuals typically have the time, interest, and desire to research market dynamics, understand various investment products, and make their own trading decisions. Experienced investors often choose this account type to maintain direct control over their portfolio and assess the recommendations provided by their financial professional. It also appeals to those who wish to learn more about investing by engaging directly with their portfolio decisions. This account structure requires the client to be comfortable with the ongoing responsibility of monitoring their investments and providing timely instructions for transactions.