Discretionary & Investment Advisory Accounts

tamer hamed 3:03:00 PM
Discretionary Accounts
When a registered representative can trade the customer's account without talking to the customer first, we call this a discretionary account. In other words, what is purchased and sold for the customer is up to the agent's and firm's discretion. That means if the registered representative decides to buy 1,000 shares of MSFT, he can do so without first contacting the customer. The customer must sign a discretionary authorization form to grant this authority to the agent and firm, and the account must be reviewed more frequently, but that's about it. From then on, the registered representative can buy or sell securities for the customer without first talking to him.

On the other hand, unless the account is a discretionary account, the only thing that can be determined for the customer is the time or price at which to execute a specific transaction. If a customer calls and says, "Buy some computer chip manufacturers today," do we need discretionary authority before you buy 100 shares of Intel?
Yes. If the registered representative chooses the security (or the number of shares), that requires discretionary authority. If a customer calls up and says, "Buy 1,000 shares of Intel today," does the registered representative need discretionary authorization? No, the customer told him what to buy and how much of it to purchase. The only thing left to decide is the best time and price at which to do it, and time/price discretion does not require discretionary authorization over the account.

These market orders that don't have to be placed immediately are called "market not held orders." They are only good for that day and may not be executed tomorrow or the next day without talking to the customer again.

When entering a discretionary order, the registered representative marks the order ticket "discretionary" at the broker-dealer, and a principal is assigned to make sure the securities purchased are appropriate and that the agent isn't churning the account.

Having the power to choose investments is often convenient, but the securities profes¬sional still must purchase what is suitable for the customer given her objectives, time horizon, risk tolerance, and capital resources. If a registered representative purchases unsuitable investments for a discretionary account, it's not just a bad idea—it's a vio¬lation of SEC, SRO, and state securities regulations.

Investment Advisory Accounts
Investment advisers typically have the discretion to enter trades for their clients' accounts, and those accounts are often held in custody by a broker-dealer independ¬ent of the advisory firm. The broker-dealer must verify that the investment adviser has discretionary authority to enter transactions in those accounts. It would be the broker-dealer sending customers their account statements, at least monthly, by the way, rather than the adviser. And, the broker-dealer can pay the adviser the customer's advisory fee, provided the adviser sends a billing statement to both the broker-dealer and the customer.


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