With discretionary management, you give your advisor written permission to buy and sell investments in your account without asking you before each trade, inside limits you agree. With non-discretionary management, the advisor recommends and you approve every trade. Discretion is the better choice for most people who hire someone to manage money, because rebalancing and tax moves happen on time rather than when you answer the phone. Non-discretionary suits you if you want the final say on every trade and will respond quickly. The price usually isn’t what decides it: fee-only firms that manage investments charge a median 1% of assets a year either way.
The short version
| Discretionary | Non-discretionary | |
|---|---|---|
| Who decides each trade | The advisor, within limits you set | You, after the advisor recommends |
| How fast trades happen | When the advisor decides | When you say yes |
| Your time | Meetings and statements | A call or email for each trade |
| Limits you can set | Holdings not to sell, investments to avoid, cash to keep | You decide every time |
| Can the advisor withdraw money | No, beyond the agreed fee | No, beyond the agreed fee |
| How it’s granted | A written agreement, often a limited power of attorney | The advisory agreement |
| Where it’s disclosed | Form CRS and Form ADV Part 2A | Form CRS and Form ADV Part 2A |
Either way, an investment adviser owes you a fiduciary duty. The discretionary authority you grant, or don’t, decides who presses the button.
What discretion actually lets an advisor do
Discretion means the advisor can place trades in your account without calling you first. In practice that covers rebalancing back to your target mix, selling at a loss to offset gains (tax-loss harvesting), investing new deposits and raising cash for a withdrawal you asked for.
It doesn’t let the advisor move your money anywhere but back to you, apart from deducting the fee you agreed. Your account stays at a qualified custodian in your name, which sends you its own statements. Read those, not just the advisor’s report.
The SEC requires an adviser that accepts discretion to say so in its brochure, “describe any limitations clients may (or customarily do) place on this authority,” and describe how it gets that authority, “e.g., execution of a power of attorney.” So limits are normal. Common ones:
- Don’t sell inherited shares or company stock without asking
- Don’t buy certain industries or companies
- Keep a set amount in cash
- Don’t realize gains above a set amount in a tax year
Write them into an investment policy statement so both of you can point to them later.
What non-discretionary looks like day to day
The advisor still does the research and recommends trades. Then it waits for you. The SEC requires firms offering non-discretionary services to “explain that the retail investor makes the ultimate decision regarding the purchase or sale of investments.”
That control has a cost in timing. If you’re traveling during a market drop, a rebalance or a tax-loss sale waits until you reply. A trade the advisor wanted to place for all its clients at once may be placed later for you. None of that matters much for a buy-and-hold portfolio you rarely change. It matters more when markets move fast or when tax decisions have a deadline, such as year-end.
Non-discretionary isn’t the same as unwatched. The SEC’s 2019 interpretation ties an adviser’s duty to monitor to the scope of the relationship: when the adviser “has an ongoing relationship with a client and is compensated with a periodic asset-based fee,” that duty is “relatively extensive.” Ask how often the advisor will review your account and when they’ll call you with a recommendation.
Brokers are different
A broker can hold discretion too, but under a separate rule. FINRA Rule 3260 bars a broker from trading at their discretion unless you’ve given “prior written authorization to a stated individual or individuals.” A narrower kind, discretion over only the time and price of an order you already chose, lasts “only until the end of the business day” unless you sign and date something that says otherwise.
If someone tells you they “manage” your brokerage account, ask whether it’s an advisory account with discretion, an advisory account without it, or a brokerage account where you approve trades. A dual-registrant can offer all three. Our guide to RIA vs broker-dealer explains how the two roles differ.
What each costs
Our fee report doesn’t split prices by discretion. What a firm publishes is its general fee schedule, and these are the medians:
US medians from prices firms publish on their own websites
Source: Wellspent fee report
A percentage-of-assets fee usually pays for ongoing management. If you want to approve every trade, ask whether there’s a lower price. If you want advice without anyone touching your accounts, an advice-only planner on a flat or hourly fee is the cleaner fit, and you place the trades yourself.
On $750,000, a 1% fee is $7,500 a year (based on the median rate, before any discounts for larger balances). Our guide to whether 1% is too much works through the numbers.
When discretionary is the better choice
- You want the investing off your plate. That’s what you’re paying for, and approving trades puts part of it back on you.
- Your plan depends on timing. Rebalancing after a sharp drop, harvesting losses, or raising cash for retirement withdrawals each month.
- You travel, work long hours or don’t want the calls.
- Several accounts need to move together. Placing the right investments in the right account (asset location) means coordinated trades.
When non-discretionary is the better choice
- You want the final say. Some people sleep better approving every trade, and that’s a fair reason.
- You’re new to the advisor. Starting non-discretionary for six months, then granting discretion, is a reasonable way to build trust.
- The account holds something sensitive. Company stock with a sale plan, a concentrated position, or shares with a very low cost basis.
- You respond quickly. If you’ll answer within a day, you lose little by approving.
How to check what you’re signing
- Read the Form CRS. Under “What investment services and advice can you provide me?”, an adviser must describe its investment authority, including “the specific circumstances that would trigger this authority and any material limitations.” Find it on the SEC’s adviser search.
- Open the brochure. Form ADV Part 2A, Item 4, must show how much of the firm’s client money it manages on a discretionary basis and how much non-discretionary. Item 16 describes the limits you can set. Our glossary entry on Form ADV Part 2A explains the rest.
- Read the agreement. Look for the words “discretionary authority” or “limited power of attorney,” which accounts they cover, and how you can revoke it.
- Check the custodian’s paperwork. The trading authorization form you sign at the custodian should limit the advisor to trading and fee deduction, with no right to send money to anyone else.
- Confirm how the advisor is paid. Discretion matters more if the advisor earns commissions on what they buy. A fee-only advisor doesn’t. Our guide to telling whether an advisor is fee-only shows where to look.
If you later decide to move, discretion doesn’t make leaving harder. Our guide to switching advisors covers the transfer.