Discretionary Account
A Discretionary Account, also known as a Managed Account, is an investment account where the client grants permission to a financial advisor or broker to make investment decisions on their behalf, without needing prior approval for each transaction. These accounts are typically managed by professional investment managers who devise and execute investment strategies based on the client's investment goals, risk tolerance, and financial situation. The advantage of a discretionary account lies in its ability to quickly react to market changes and leverage professional expertise for investment decisions, but it also requires a high level of trust in the investment manager.
Definition: A discretionary account is an investment account where the client authorizes an investment advisor or broker to make investment decisions based on their judgment and strategy without needing prior approval for each transaction. These accounts are typically managed by professional investment managers who formulate and execute investment strategies based on the client's investment goals, risk tolerance, and financial situation. The advantage of a discretionary account is the ability to quickly respond to market changes and leverage professional expertise in making investment decisions, but it also requires a high level of trust in the investment manager.
Origin: The concept of discretionary accounts originated in the mid-20th century as financial markets became more complex and specialized. Investors increasingly needed professional assistance to manage their portfolios. The earliest discretionary accounts appeared in the United States and gradually spread worldwide.
Categories and Characteristics: Discretionary accounts can be categorized into several types, including:
- Single Account: Managed by one investment manager, suitable for investors with smaller funds.
- Diversified Account: Managed by multiple investment managers, suitable for investors with larger funds, allowing for risk diversification.
- Customized Account: Tailored to the specific needs and goals of the client, offering high flexibility.
- Professional Management: Operated by experienced investment managers.
- Quick Decision-Making: No need for client approval for each transaction, allowing for rapid market response.
- Personalized Service: Tailored to the client's investment goals and risk tolerance.
Specific Cases:
- Case 1: Mr. Zhang is a busy entrepreneur with no time or energy to manage his investments. He chose a well-known investment firm to open a discretionary account, authorizing the investment manager to make decisions based on market conditions. After several years, Mr. Zhang's portfolio achieved significant returns, far exceeding the market average.
- Case 2: Ms. Li is a retired teacher looking to increase her retirement income through investments. She chose a professional wealth management company and opened a discretionary account. The investment manager formulated a conservative investment strategy based on her risk tolerance and financial goals, ensuring her portfolio remained stable amid market fluctuations.
Common Questions:
- How are the fees for a discretionary account calculated? They typically include management fees and performance fees, with specific fee structures varying by company.
- How do I choose the right investment manager? Consider the investment manager's track record, professional background, and client reviews.
- Is a discretionary account suitable for everyone? Not necessarily; it is suitable for investors who lack the time or expertise to manage their investments themselves.
