What Is the Difference Between a Discretionary and Non-Discretionary Account?
When potential clients call my office about an investment fraud case, one
of the first things we want to know is whether the investment account
is non-discretionary or discretionary. Understandably, most investors
don’t know how to answer that question. I think there are two main
reasons for this.
One reason is that too many brokers don’t explain the difference
between non-discretionary and discretionary accounts when they are dealing
with their customers.
Another reason is, far too often, brokers treat non-discretionary accounts
as if they were discretionary accounts, even though the broker doesn’t
have authority from the customer to make trades on a discretionary basis.
A non-discretionary investment means that the broker has to contact you
and get your permission before making any trades in your account. In a
discretionary account, the broker is permitted to exercise their own discretion
and make purchases or sales of securities without talking to you and getting
In both types of accounts, a broker is required to make recommendations
that are appropriate for you, taking into consideration your unique circumstances,
goals, and your tolerance for risk.
In the approximately thousands of cases I’ve handled against brokerage
firms, I have seen countless instances where brokers make trades in investment
accounts acting as if they had discretionary authority even though the
paperwork signed by the customer indicates that the account is supposed
to be treated as a non-discretionary account.
In these cases, the customer may have various avenues for recovery against
a broker and a brokerage firm for losses that occurred as a result of
the trades made by the broker. These include claims for unauthorized trading,
and recommending purchasing unsuitable investments, as well as claims
for breach of fiduciary duty relating to the brokerage control over the
Whether you have suffered investment losses in a non-discretionary or discretionary
account, it is important to understand that you do have legal rights and
you may be able to recover your losses if there is misconduct regardless
of whether the broker was acting on a discretionary or non-discretionary
basis. Please contact us if you would like additional information on these issues.