Discretionary authority is a client's written grant of power permitting an investment adviser to select, buy, and sell securities in the client's account — deciding the security, amount, and timing — without obtaining the client's consent before each transaction. It is usually conveyed through a limited power of attorney in the advisory agreement or the custodian's account paperwork, and its existence and scope must be disclosed in the adviser's Form ADV.
Discretionary Authority
Discretionary authority is the power a client grants an investment adviser to buy and sell investments in the client's account without asking permission before each trade.
Reviewed by
Steven Fox, CFP®, EA
Updated
Quick Summary
- With discretion, the adviser decides and executes trades in your account on their own; without it, they must get your approval for every transaction.
- Discretion is granted in writing — typically a limited power of attorney inside the advisory or account agreement — and can be revoked.
- Advisers must disclose whether they take discretion in their Form ADV, which you can read on adviserinfo.sec.gov.
- Advice-only planners take no discretionary authority at all — you keep full control and place your own trades.
Definition
Advanced Explanation
Discretion defines the operating mode of the advisory relationship. In a discretionary account, the adviser runs the portfolio inside agreed guardrails — the investment policy statement or stated strategy — and you learn about trades from confirmations and statements after the fact. In a non-discretionary account, the adviser recommends and you decide; nothing happens without your yes. Neither mode changes the adviser's underlying legal duty — an investment adviser owes clients a fiduciary duty either way — but discretion raises the stakes of that duty, because the adviser's judgment operates without a per-trade checkpoint.
A few boundaries keep the concept precise. Discretion is limited: a standard trading authorization allows buying and selling in your account at your custodian — it does not let the adviser withdraw your money, and authority to move funds out of an account is a different, heavier grant that triggers the SEC's custody rules. Discretion is also revocable: you can withdraw it or terminate the agreement. And it is disclosed: Form ADV requires advisers to state whether they exercise discretionary authority and over how much in assets. The practical trade is efficiency versus control. Discretion lets an adviser rebalance, harvest tax losses, and react across all client accounts promptly; non-discretionary and advice-only arrangements keep every decision in your hands at the cost of your own follow-through being the bottleneck.
Used in a Sentence
“Because she'd granted her adviser discretionary authority, the portfolio was rebalanced the week markets dropped — she read about the trades on her statement afterward.”
How It Works
Granting discretion happens at account setup: the advisory agreement and the custodian's forms include a limited trading authorization, you sign, and the adviser can then trade the account within the strategy you agreed to. The guardrails live in the engagement documents — target allocation, restrictions you impose (say, never sell a legacy stock position), and reporting cadence.
A hypothetical example of the difference in practice: Marcus and Dana each hold a $400,000 portfolio targeted at 70% stocks. After a sharp market move, both portfolios drift to 78% stocks. Marcus's adviser has discretion: the account is rebalanced back to target that week, and he sees the confirmations afterward. Dana's arrangement is non-discretionary: her adviser emails a recommendation, she's traveling, and the rebalance happens three weeks later — or not at all if she forgets to reply. Neither outcome is automatically better (Dana keeps a veto Marcus gave up), but the mechanics differ exactly there. (Illustrative scenario.)
Pros and Cons
Pros
- Timely execution — rebalancing, tax-loss harvesting, and strategy changes don't wait on your availability.
- Removes the client-response bottleneck that leaves non-discretionary recommendations unimplemented.
- Scope is limited and documented: trading authority, not the power to withdraw your funds, and you can revoke it.
Cons
- You surrender per-trade control; oversight shifts to reviewing statements after the fact.
- Requires meaningful trust in the adviser's judgment and processes — problems surface after trades settle, not before.
- Usually packaged with ongoing management fees; people who want to retain control may be paying for authority they don't want to grant.
People Also Asked
Answers to the most frequently asked questions.
Does giving an adviser discretion mean they can take my money?
No. Standard discretionary authority is a limited trading authorization: the adviser can buy and sell within your account at your custodian, but cannot move money out to themselves or third parties. Withdrawal authority is a separate grant with stricter regulatory consequences under the SEC's custody rules. Read the authorization language so you know exactly which powers you're signing.
Can I revoke discretionary authority?
Yes. Discretion is granted by agreement and can be withdrawn — by amending the authorization with your custodian, converting to a non-discretionary arrangement if the adviser offers one, or terminating the advisory relationship. Your advisory agreement spells out the mechanics and notice requirements.
How do I know if an adviser takes discretion?
Ask, and then verify in writing: Form ADV requires every Registered Investment Adviser to disclose whether it exercises discretionary authority and the amount of assets it manages on that basis. You can read any adviser's Form ADV free on the SEC's Investment Adviser Public Disclosure site (adviserinfo.sec.gov).
Do advice-only planners have discretionary authority?
No — that's a defining feature of the model. An advice-only planner recommends; you implement in accounts only you control, so no trading authority ever changes hands. It suits people who want professional guidance while keeping every execution decision, though it also means follow-through is entirely on you.
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