Discretionary vs. Non-Discretionary Accounts

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.