Discretionary Account

What is a Discretionary Account?

A Discretionary Account is an investment account where the investor delegates all trading and decision-making authority to a professional investment manager or institution. In a Discretionary Account, the investment manager or institution has the power to trade and make investment decisions based on the investor's risk tolerance, investment objectives, and agreed-upon strategy, including buying, selling, holding, and adjusting the asset portfolio.

Types of Discretionary Accounts

Depending on the type of investor and their investment needs, Discretionary Accounts can be classified into several types:

1. Individual Discretionary Accounts: Investors delegate the operation and decision-making authority of their personal investment accounts to professional investment managers or institutions. The investment manager makes decisions based on the investor's needs and the agreed-upon strategy.
2. Institutional Discretionary Accounts: These accounts are for businesses, institutions, or organizations that delegate the operation and decision-making authority of their investment accounts to professional investment managers or institutions. These accounts often involve larger amounts of money and more complex strategies.
3. Fund Discretionary Accounts: Investors delegate the management and operation of their investment funds to professional fund management companies or investment advisors. Investors buy fund shares and enjoy the returns, while the fund management company manages the fund's assets based on its strategy.
4. Wealth Management Discretionary Accounts: Targeted at high-net-worth individuals or family offices, these accounts involve delegating wealth management responsibilities to a professional wealth management team. The team customizes strategies based on the investor's needs and goals to manage and operate the investment portfolio.

Characteristics of Discretionary Accounts

The characteristics of Discretionary Accounts can vary depending on the investment manager or institution. Here are some key features:

1. Delegated Authority: Investors do not directly participate in investment decisions and trading operations. Instead, they delegate full authority to professional investment managers or institutions to manage and operate the account.
2. Customization: Investment managers or institutions tailor investment strategies and portfolio configurations based on the investor's risk tolerance, investment goals, preferences, and needs.
3. Professional Management: Skilled investment managers or institutions with extensive knowledge and experience in investments make decisions and trade based on market conditions and investor requirements.
4. Transparency and Oversight: Investment managers or institutions provide regular detailed transaction records and performance reports to keep investors informed about the account's operations.
5. Diversified Investments: Managers or institutions allocate assets according to the investor's preferences and market conditions to achieve risk diversification and portfolio variety.
6. High Risk and High Return: Discretionary Accounts may invest in high-risk assets or strategies to pursue higher returns. Investors should fully understand and evaluate the risks and maintain thorough communication and consultation with the investment manager or institution.

Advantages and Disadvantages of Discretionary Accounts

Advantages

1. Professional Management: Investors benefit from the professional knowledge and experience of investment managers or institutions by delegating trading and decision-making authority to them.
2. Customization: Managers or institutions customize strategies and portfolio configurations to fit the investor's specific goals and needs based on their risk tolerance, investment objectives, and preferences.
3. Time and Effort Savings: By delegating market research and decision-making to professional managers or institutions, investors have ample time and energy to focus on other tasks.
4. Diversified Investments: Managers or institutions allocate assets to achieve risk diversification and a varied portfolio according to the investor's needs and market conditions.

Disadvantages

1. Trust and Control: Investors may not fully understand every transaction and decision or have complete control over the account's investment risk and ethical considerations.
2. Costs and Expenses: Discretionary Accounts usually involve management fees and transaction costs that may impact investment returns.
3. Delayed Adjustments: Investors might need time and process to negotiate and communicate with managers or institutions to adjust strategies and asset allocations.
4. Market Risk: Despite the expertise of managers or institutions, market risk is always present. The portfolio may suffer from market volatility and unpredictability.

Markets Suitable for Discretionary Accounts

Based on different investment goals, risk tolerance, and preferences, Discretionary Accounts can participate in various markets, including but not limited to:

1. Stock Market: Discretionary Accounts can be used in the stock market where managers or institutions trade stocks and manage portfolios based on the investor's needs and strategies.
2. Bond Market: These accounts can also apply to the bond market, where managers or institutions create suitable bond portfolios based on the investor's risk preferences and objectives.
3. Foreign Exchange Market: Discretionary Accounts can be used in the forex market for trading currencies and managing forex portfolios per the investor's requirements.
4. Commodity Market: These accounts are suitable for the commodity market, allowing managers or institutions to engage in commodity futures or other commodity-related investments according to the investor's demands.
5. Derivatives Market: Discretionary Accounts can be applied to the derivatives market where managers or institutions execute derivatives trading and risk management according to the investor's needs and strategies.