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 your permission.
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 investment account.
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.