Quick Answer
A trade is discretionary when the representative picks the asset, action, or amount without prior customer approval. Discretionary accounts require written power of attorney and principal review of each trade, while non-discretionary accounts need no special authorization. Choosing only price or time for an order is not discretionary.
Understanding the difference between discretionary and non-discretionary accounts matters because discretionary authority creates heightened obligations and supervision requirements.
Key Differences
| Feature | Discretionary | Non-Discretionary |
|---|---|---|
| Authority | Rep chooses asset, action, and/or amount | Customer makes all investment decisions |
| Authorization | Written power of attorney required | No special authorization needed |
| Supervision | Each trade reviewed and approved by a principal | Normal supervisory procedures |
| Suitability | Heightened suitability obligation | Standard suitability |
| Common concern | Excessive trading (churning) | N/A |
What Makes an Order "Discretionary"?
A trade is discretionary when the representative decides any of the following without the customer's prior approval for that specific trade:
- What to buy or sell (the asset)
- Whether to buy or sell (the action)
- How much to buy or sell (the amount)
What Is NOT Discretionary?
- Choosing only the time or price of execution is NOT discretionary
- Example: A customer says "Buy 100 shares of XYZ when it drops to $50" - the rep is only deciding timing, so no discretionary authority is needed
Exam Tip: Gotchas
Written power of attorney is REQUIRED before a representative can exercise discretionary authority. Without it, every trade decision must come from the customer.
Supervision Requirements
- Each discretionary trade must be reviewed and approved by a principal
- This heightened supervision exists because the rep is acting on behalf of the customer without specific instructions
- Discretionary accounts are closely monitored for churning (excessive trading to generate commissions)
Exam Tip: Gotchas
If a customer says "buy something in the tech sector," the rep is choosing the specific asset; that IS discretionary. But if a customer says "buy 200 shares of Apple at the best price," the rep is only deciding price and timing; that is NOT discretionary. The exam tests this distinction frequently.
What Should You Check on Exam Day?
- Can you name the three things that make a trade discretionary: asset, action, or amount?
- Do you know what authorization is required before a rep can exercise discretionary authority?
- Can you explain why choosing only price or timing is not discretionary?
- Do you know why discretionary accounts require principal review of every trade?
- Can you explain what churning is and why discretionary accounts are watched for it?