A discretionary account, also known as a managed account, is an investment account that is owned by an individual investor but managed by a hired professional money manager.
In a discretionary account, the account holder grants the manager discretionary authority, meaning the manager can make buy and sell decisions without requiring the account holder’s approval for each trade.
This type of account is commonly used by investors who lack the time or expertise to manage their portfolios. The main benefits of a discretionary account are:
- Expert Management: The account is managed by professionals who have extensive knowledge and experience in financial markets.
- Time-Saving: The investor doesn’t have to monitor the markets or make trading decisions, which can be beneficial for those with limited time.
- Customized Investment Strategy: The account manager can customize the investment strategy based on the investor’s risk tolerance, financial goals, and other personal factors.
- Active Management: Discretionary accounts are actively managed, meaning the manager can quickly respond to market changes without needing to contact the investor for approval.
However, there are also some potential downsides:
- Cost: Discretionary accounts often come with higher fees compared to self-directed accounts due to the professional management services provided.
- Lack of Control: The investor cedes control over day-to-day investment decisions, which may not suit everyone.
- Risk of Misalignment: There’s a risk that the manager’s decisions may not always align with the investor’s objectives or risk tolerance.
- Performance: There’s no guarantee that the manager’s decisions will result in superior returns.
Given these considerations, it’s important for investors to thoroughly research and understand the terms, costs, and potential risks before opening a discretionary account.