Discretionary vs. Non-Discretionary

Attribute	Discretionary	Non-Discretionary
Definition	Based on individual judgment or choice	Not based on individual judgment or choice
Decision-making	Decisions made at the discretion of the individual	Decisions made based on rules or regulations
Flexibility	More flexibility in decision-making	Less flexibility in decision-making
Control	Individual has more control	Control is often external
Responsibility	Individual takes responsibility for decisions	Responsibility may be shared or delegated

Definition

Discretionary refers to something that is left to one's own judgment. In the context of finance, discretionary refers to investment decisions made by a portfolio manager or advisor on behalf of a client. Non-discretionary, on the other hand, refers to investment decisions that require the client's approval before they can be executed. Non-discretionary accounts give clients more control over their investments, while discretionary accounts allow the portfolio manager to make decisions without seeking approval.

Risk

One of the key differences between discretionary and non-discretionary accounts is the level of risk involved. Discretionary accounts may carry a higher level of risk because the portfolio manager has the authority to make investment decisions without consulting the client. This can lead to more aggressive investment strategies being implemented, which may result in higher returns but also higher potential losses. Non-discretionary accounts, on the other hand, give clients more control over their investments and allow them to make decisions based on their risk tolerance and investment goals.

Flexibility

Discretionary accounts offer investors more flexibility in terms of decision-making. Portfolio managers have the authority to make changes to the investment portfolio without seeking approval from the client. This can be beneficial in fast-moving markets where quick decisions need to be made to take advantage of opportunities or mitigate risks. Non-discretionary accounts, on the other hand, require clients to approve any changes to the investment portfolio, which can limit flexibility and potentially result in missed opportunities.

Cost

Another important factor to consider when comparing discretionary and non-discretionary accounts is the cost. Discretionary accounts typically have higher fees because the portfolio manager is actively managing the investments on behalf of the client. These fees are often based on a percentage of assets under management, which can add up over time. Non-discretionary accounts, on the other hand, may have lower fees because the client is more involved in the decision-making process and the portfolio manager's role is more limited.

Performance

When it comes to performance, discretionary and non-discretionary accounts can yield different results. Discretionary accounts may outperform non-discretionary accounts in certain market conditions, especially when the portfolio manager is skilled at making strategic investment decisions. However, non-discretionary accounts can also perform well if the client is actively involved in managing their investments and makes informed decisions based on market trends and economic indicators.

Control

Control is a key factor to consider when choosing between discretionary and non-discretionary accounts. Discretionary accounts give the portfolio manager more control over the investment decisions, which can be beneficial for clients who prefer a hands-off approach to investing. Non-discretionary accounts, on the other hand, give clients more control over their investments and allow them to have a say in how their money is being managed. This can be important for clients who want to be actively involved in the decision-making process.

Regulation

Regulation is another important aspect to consider when comparing discretionary and non-discretionary accounts. Discretionary accounts are subject to stricter regulations because the portfolio manager is making investment decisions on behalf of the client. This means that portfolio managers must adhere to certain guidelines and standards to ensure that they are acting in the best interests of their clients. Non-discretionary accounts, on the other hand, may have fewer regulatory requirements because the client is more involved in the decision-making process.

Conclusion

In conclusion, both discretionary and non-discretionary accounts have their own set of attributes that make them suitable for different types of investors. Discretionary accounts offer more flexibility and potentially higher returns, but they also come with higher fees and risks. Non-discretionary accounts give clients more control over their investments and may have lower fees, but they can also limit flexibility and potentially result in missed opportunities. Ultimately, the choice between discretionary and non-discretionary accounts will depend on the investor's risk tolerance, investment goals, and level of involvement in managing their investments.