Discretionary vs. Non-Discretionary Investment Accounts

15 March, 2024

When you open your account with your broker, you will decide whether you want to choose your own trades, or have the broker trade for you. Giving discretionary authority to a broker is a massive display of trust that they will do right by you.

Unfortunately, some do not. They either place their own interests first, or they simply do not have the expertise to make the proper choices. If you have lost money due to illegal broker activity in a discretionary or non-discretionary account, the broker misconduct attorneys at Rikard & Protopapas can help you fight to get your money back.

The Differences Between Discretionary and Non-Discretionary Accounts

When you entrust your money and investments to a broker, you are faced with a choice about how active you want to be in managing your own investments. You may not want the pressure and responsibility of choosing your own investments.

There is something to be said for the broker using their own expertise for your benefit.

Your broker closely follows the markets, and they have knowledge that can help you.

When your account is non-discretionary, the broker’s role is to act as an intermediary to carry out your orders. You have reached an investment decision, whether it is on your own or after receiving advice, and you are transmitting an order to your broker for them to execute. If the broker wants to make a trade on your behalf, they must contact you first and get your consent and permission.

Discretionary vs. non-discretionary accounts often come down to the difference between someone who wants to take a do-it-yourself approach to investing (often, after listening to their broker’s recommendation) and one who wants a more full-service approach.

You may feel more comfortable delegating everything relating to investing to your broker. You are trusting them to use their knowledge and expertise for your benefits and in your interests.

There is another major difference between discretionary and non-discretionary accounts. In a discretionary account, the broker owes you a fiduciary duty. Courts have held that there is no fiduciary duty owed in a non-discretionary account, although the broker must still follow FINRA rules with regard to your trades.

Brokers Can Still Violate Their Obligations in a Non-Discretionary Account

If you have a non-discretionary account, there is still a way that you can give some form of discretion to a broker. You can give them time-and-price discretion about when and how they execute an order.

For example, you may want to sell shares of a stock in which there is no liquid market. If you sell immediately and at once, you may get a worse execution price. You’d give your broker time-and-price discretion, so they can “work” the order and get you a better execution of the trade.

Brokers Can Cause Significant Losses in a Discretionary Account

When a broker is given discretionary authority in an account, they do not have an unlimited right to do whatever they want for the client. The trades that they must execute still must be suitable for the client and fit their overall investment profile.

The broker on a discretionary account is still held to rules, such as restrictions on excessive trading because they are still earning fees and commissions from the trades.

When you have given the broker discretionary trading authority, you must still track your own brokerage account. You should review the account statements and trade confirmations to see what your broker is doing on your behalf. Always question what does not make sense, and pay close attention to the broker’s answers.

How to Spot Broker Misconduct

You should be on the lookout for the following signs of illegal conduct:

  • You are receiving an excessive amount of trade confirmations.
  • Your portfolio is over-concentrated in one security.
  • There is a dramatic change in the composition of your portfolio.
  • You do not understand the securities in which your broker is investing.
  • Your broker will not provide you with prompt or straight answers to your questions.

Many of these same warning signs apply in a non-discretionary account. You should still check your statements regularly, even if the broker does not have discretionary authority.

Another warning sign in a non-discretionary account is if your broker seems to be excessively pressuring you to do something. Even when you are the only one who has trading authority, the broker may still execute unauthorized trades on your behalf. They could place securities in your account when they make an erroneous trade for someone else.

Contact an Attorney to File a FINRA Arbitration Claim

You may seek financial compensation in a FINRA arbitration claim when your broker has done the following:

  • They have made an unauthorized trade, exercising discretion in your account when they do not have discretionary authority.
  • The broker abuses their discretion by making trades that are unsuitable for you, or they engage in conflicts of interest, where they place their own interests first

It may take some doing to learn exactly what your broker did. You may just see that you have lost an excessive amount of money, think something is wrong, but you have no idea what happened.

When you contact a FINRA arbitration lawyer, they will review the facts of your case to determine whether your broker violated any rules. They could help you take legal action, filing an arbitration claim with FINRA that seeks compensation from your broker. Whether you trade in a discretionary or non-discretionary account, you need legal help to take on a powerful brokerage.

Contact an Investment Fraud Attorney Today

The investment fraud attorneys at Rikard & Protopapas help defrauded clients fight back. We level the playing field when you feel powerless. We can hold your broker accountable and make them answer for what they did. You should reach out to us as soon as you think that something is wrong to hopefully minimize some of your financial losses. Then, we could investigate further and prepare your arbitration filing. To speak with an experienced FINRA arbitration attorney, fill out an online contact form or call us today at (803)-805-7546.

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