What it means
In a standard brokerage account, the client approves each trade. In a fully discretionary account, the broker may trade on the client's behalf without asking, and in a limited discretionary account the broker's freedom is restricted to certain decisions.
Typical limits include the choice of security, the size of any one position, the type of investment, or the maximum amount that can be traded in a day. These limits are documented in a signed agreement, because regulators require written authority for discretion.
Clients choose these accounts for convenience and speed. A broker can act quickly on market moves, such as buying at a good price while the client is travelling, without waiting for a phone call.
The arrangement carries risks. The client gives up some control, and the broker may be tempted to trade too often to earn commissions, which is known as churning.
Regulators and firms therefore monitor discretionary accounts closely. Clients should review statements regularly and confirm that all trades fit the written limits.
If the broker steps outside the agreement, the client may have grounds to complain or seek compensation. Rules differ by country, and firms often add their own approval and supervision requirements.
Anyone considering such an account should read the agreement carefully and ask what fees apply.
In practice
Real-world examples.
Example
A busy surgeon opens an account and tells her broker he may choose the timing and price of purchases from an approved list of 20 funds. She does not need to approve each trade. She receives a confirmation after each one. The broker records each decision against the written authority.
Example
A retired engineer allows his adviser to rebalance his portfolio within a band of 5% from target without calling him. Any larger change requires his consent. The written agreement lists the target mix. The adviser reports each rebalance in the quarterly statement.
Example
A compliance officer at a brokerage reviews limited discretionary accounts each month. She checks that trades match the written limits and that trading frequency is reasonable. She escalates one account where trades far exceed the agreed size. The firm can restrict the account or end the discretion if breaches continue.
Formula
Calculation
Maximum position size = Account value x Position limit percentage
Suppose a client has a $200,000 account and sets a limit of 5% per position. The maximum for any one holding is 200,000 x 0.05 = $10,000. If a share costs $25, the broker may buy at most 10,000 / 25 = 400 shares without asking. Buying 500 shares would cost $12,500, which exceeds the limit by $2,500, so the broker would need the client's approval first. The limit protects the client from concentration, since no single holding can exceed 5% of the account. The percentage is applied to the account value at the time of the trade, so the dollar limit rises and falls as the account grows or shrinks.Case study
Seen in the real world.
Westbury Securities is an illustrative, fictional brokerage. A client, Elena, signs an agreement giving her broker authority to choose the timing of trades in a $300,000 account, but only in a list of 15 large-company shares and with a limit of 4% per position.
The maximum position is 300,000 x 0.04 = $12,000. When one share dips on a market scare, the broker buys $11,000 worth immediately without calling. A later review confirms the purchase met the limits. The story is invented, but it shows how limited discretion allows speed with boundaries.
Elena's quarterly review showed 11 trades, all within the written limits, and total commissions of $410. She decided to keep the arrangement but asked the firm to send her a short email after each trade over $5,000, so she could follow the activity in real time.
Watch out
Common mistakes.
- Giving verbal permission only. Regulators generally require written authority for discretion. Without a signed record, the broker has no protection and the client has little to point to in a dispute.
- Assuming the broker can do anything. The authority extends only as far as the written limits.
- Not reading statements. Regular review is how clients spot trades outside their agreement. A monthly check takes only a few minutes and can prevent large problems.
Questions
People also ask.
What is the difference between limited and full discretion?
In a limited account the broker has authority over certain decisions only, whereas in a full account the broker controls most decisions.
Why would I want one?
It allows quick action on your behalf while you keep control over key choices. The arrangement works best with a broker whose fees and track record the client has checked.
What is churning?
It is excessive trading to generate commissions, and it is prohibited in discretionary accounts.
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