What it means to trade on a client’s behalf without approval for each order, how advisers and agents obtain written authority, and where custody and power of attorney fit in.

Discretionary authority is permission from a client that allows an investment adviser or a broker-dealer’s representative to decide what to buy or sell in the client’s account, and how much, without asking the client before each trade. The three decisions that make up discretion are often remembered as asset, action and amount: which security, whether to buy or sell, and how many shares or what dollar value.

Decisions about time and price alone are not discretion. If the client chooses the security, the action and the amount, and leaves only the timing and price of execution to the professional, the account is not a discretionary account.

This guide explains what discretionary authority covers, how it is granted, the different rules for investment advisers and broker-dealers, how it differs from custody and from a full power of attorney, the risks it creates, worked examples, the exam traps and five practice questions. For the account type itself, the FRC dictionary entry on a discretionary account gives the core definition.

Why Clients Grant Discretion

Many clients want a professional to manage their money day to day without being contacted before every trade. Discretion lets the manager act quickly when markets move, rebalance portfolios and apply a strategy consistently across accounts.

Most managed accounts at investment advisers are discretionary. The client agrees the objectives, risk level and any restrictions at the outset, and the adviser then makes the individual decisions within those limits.

Discretion also creates risk. Because the client is not approving each trade, the rules require written authority, supervision and careful records to make sure the power is not abused.

Where This Topic Appears on the Exams

Discretionary authority is tested in the laws and regulations sections of the Series 65 and Series 66, and it is a core topic on the Series 7 and Series 63. Questions often ask whether a particular instruction is discretionary, when written authority must be obtained, or which practices are unethical in a discretionary account.

FRC’s Series 65 Exam Preparation course covers discretion under the state and federal adviser rules, and the Series 65 needs no sponsoring firm. The Series 7 Exam Preparation course covers the broker-dealer rules on discretionary accounts in detail, and the SIE Examination Preparation course introduces both.

Every FRC course can be spread across interest-free monthly payments, so cost is no reason to delay. Discretion questions turn on a few precise distinctions, which makes them reliable marks once those distinctions are clear.

Asset, Action and Amount

A professional exercises discretion when they decide any one of the asset, the action or the amount. If a client says “invest $20,000 in whatever technology stock you think best,” the representative is choosing the asset, so the trade is discretionary.

If a client says “buy some shares of this company for me,” leaving the number of shares to the representative, the representative is choosing the amount. That too is discretion.

Only when the client specifies all three, for example “buy 200 shares of this company,” is the order non-discretionary. The professional then simply executes the client’s decision.

Time and Price Are Not Discretion

A client may specify the asset, action and amount but leave the timing and price to the professional, for example “buy 200 shares of this company today, at the best price you can get.” This is time and price discretion, and it is not treated as full discretionary authority.

Because the client has made the investment decision, no written discretionary authorization is needed. The professional is only choosing when and at what price to execute.

For broker-dealer representatives, FINRA rules limit time and price discretion to the day the order is given, unless the client authorizes a longer period in writing. An order left with time and price discretion is not a license to hold it open indefinitely.

How Investment Advisers Obtain Discretion

Under the NASAA model rules adopted by most states, a state-registered investment adviser may exercise discretion on the basis of oral authority from the client. It must then obtain written discretionary authority within ten business days after the date of the first discretionary transaction.

Exercising discretion without obtaining written authority within that period is an unethical business practice. The adviser’s advisory contract must also state whether discretionary authority is granted, as FRC’s guide to what an investment advisory contract must include explains.

SEC-registered advisers disclose their discretionary authority in their brochure, Part 2A of Form ADV, including any limits the client may place on it. In practice they also obtain written authority, usually in the advisory agreement, before managing an account on a discretionary basis.

How Broker-Dealer Representatives Obtain Discretion

The rules for broker-dealer representatives are stricter. Under FINRA Rule 3260, a representative may not exercise discretion in a customer’s account unless the customer has given prior written authorization and the firm has accepted the account in writing.

There is no ten-day grace period for representatives. The written authorization must be in place before the first discretionary trade.

The state rules for agents follow the same approach. Under the NASAA model rules, it is an unethical practice for an agent to exercise discretion without first obtaining written authority from the customer.

Advisers and Agents Compared

The ten-business-day rule is one of the most frequently tested distinctions on the Series 65 and Series 66. Remember that it applies to advisers, not to agents.

Limits Clients Can Place on Discretion

Granting discretion does not mean giving up all control. Clients can set restrictions, such as excluding particular companies or sectors, capping the share of the portfolio in any one holding, or ruling out certain types of security altogether.

The professional must follow these restrictions as strictly as any other term of the agreement. A trade that breaks a client’s stated restriction is unauthorized, even though the account is discretionary.

Clients can also narrow or withdraw discretion at any time. Once a client revokes discretionary authority, the professional must return to seeking approval for each trade.

Supervision of Discretionary Accounts

Broker-dealers must supervise discretionary accounts closely. Under FINRA’s rules, a principal must approve each discretionary order promptly and the firm must review the account frequently to detect transactions that are excessive in size or frequency.

Investment advisers supervise discretionary accounts through their compliance programs. The policies must cover how investment decisions are made, how they are checked against each client’s objectives and restrictions, and how trades are allocated fairly among clients.

FRC’s guide to what Rule 206(4)-7 requires of an investment adviser explains how those compliance programs are built. Discretionary trading is one of the core risk areas they must address.

The Risks Discretion Creates

The main risk in a discretionary account is excessive trading, known as churning, where a professional trades frequently to generate commissions rather than to benefit the client. Because the client is not approving each trade, churning can go unnoticed for longer.

Other risks include trades that do not fit the client’s objectives, unsuitable concentrations in a single security, and trades in securities the client has excluded. Each of these is a violation of the professional’s duties to the client.

The NASAA model rules list excessive trading in a discretionary account as an unethical practice for both advisers and agents. The professional must consider the client’s financial resources and objectives, and the character of the account, when deciding how often to trade.

Discretion vs Custody

Discretion and custody are separate powers. Discretion is authority over investment decisions, while custody is access to the client’s money and securities themselves.

An adviser can have discretion without custody. A manager who chooses investments but cannot withdraw funds or deduct fees from the account has discretion only.

FRC’s guide to what custody is for an investment adviser explains when custody arises. Exam questions often describe an account with one power and ask whether the other is present.

Trading Authorization vs Full Power of Attorney

Discretion is usually granted through a limited trading authorization. This lets the professional buy and sell securities in the account, but not withdraw money or securities.

A full power of attorney goes further, allowing the holder to withdraw funds and securities as well as trade. A professional who holds a full power of attorney over a client’s account has custody as well as discretion.

Ordinary powers of attorney end when the client dies, and also if the client becomes mentally incapacitated, unless the document is a durable power of attorney. A durable power of attorney survives incapacity, but every power of attorney ends on the death of the person who granted it.

Financial Requirements for Advisers With Discretion

States set minimum financial requirements for advisers that hold discretionary authority. Under the NASAA model rule, an adviser with discretionary authority but no custody must maintain a minimum net worth of $10,000, compared with $35,000 for an adviser with custody.

Some states allow a bond instead of the net worth requirement. An adviser that falls below the minimum must notify the Administrator promptly.

The lower requirement reflects the lower risk. An adviser with discretion can make poor decisions, but it cannot take the client’s money.

Records of Discretionary Accounts

Investment advisers must keep a list of all accounts over which they have discretionary power, and copies of the documents granting that authority. Each order record must show whether the trade was placed under discretion.

FRC’s guide to what records an investment adviser must keep explains these requirements and the five-year retention period. Broker-dealers keep similar records under their own rules, including the written authorization and evidence of the firm’s acceptance.

Examiners frequently test whether discretionary trades are supported by written authority. A discretionary trade with no authorization on file is one of the clearest violations they can find.

Worked Example: The Technology Stock

A client tells her adviser representative, “Put $15,000 into a good technology stock for me.” The representative chooses the company and places the order.

The representative chose the asset, so the trade is discretionary. If the representative works for a state-registered adviser, the firm must obtain written authority within ten business days of this first discretionary trade.

If she were an agent of a broker-dealer instead, she would have needed prior written authorization and the firm’s written acceptance before placing the trade. Without them, the trade is a violation.

Worked Example: Time and Price

A client calls his broker and says, “Buy 300 shares of this company today, but wait for a dip if you can.” The broker buys later that afternoon at a lower price.

The client chose the asset, the action and the amount. The broker chose only the time and price, so this is not discretion and no written authorization is needed.

The broker must execute the order that day. If the client wanted the broker to keep trying for a better price over several days, written authorization for that would be required.

Worked Example: The Death of a Client

An adviser has managed a client’s account on a discretionary basis for ten years under a written trading authorization. The client dies.

The trading authorization ends on the client’s death. The adviser must stop exercising discretion and wait for instructions from the executor or personal representative of the estate.

Any discretionary trade placed after the adviser learns of the death would be unauthorized. The account is typically frozen until the estate’s representative provides the necessary legal documents.

The Exam Traps

The first trap is treating time and price as discretion. If the client chose the asset, action and amount, the order is not discretionary.

The second trap is applying the ten-business-day rule to agents. Only investment advisers may rely on oral authority for ten business days, while agents need prior written authority.

The third trap is confusing discretion with custody. A trading authorization gives discretion only, while a full power of attorney that allows withdrawals gives custody too.

The fourth trap is assuming a power of attorney survives the client’s death. Every power of attorney ends on death, including a durable one.

FRC’s guide to Series 65 ethics and laws questions and exam traps covers more traps in this area. For the full list, see FRC’s guide to Series 65 exam traps and common mistakes.

A Memory Aid

Remember “the three As: asset, action and amount.” If the professional decides any one of them, it is discretion, and time and price alone never are.

For the paperwork, remember “advisers get ten days, agents get none.” Advisers may rely on oral authority for ten business days, while agents need written authority first.

Practice Questions

Question one: a client tells an agent to buy 100 shares of a named company at the best price available today. Is this a discretionary order? No, the client chose the asset, action and amount, leaving only time and price.

Question two: a client tells an adviser to invest $10,000 in any utility stock. Is this discretionary? Yes, the adviser is choosing the asset.

Question three: how long does a state-registered adviser have to obtain written discretionary authority after the first discretionary trade? Ten business days.

Question four: when must a broker-dealer agent obtain written discretionary authority? Before the first discretionary trade, with the firm also accepting the account in writing.

Question five: does a durable power of attorney remain valid after the client dies? No, every power of attorney ends on the death of the person who granted it.

Related Questions

Discretionary accounts are where questions on suitability and excessive trading come together. FRC’s guide to duty of care vs duty of loyalty explains the fiduciary duties an adviser owes when it manages a client’s money on a discretionary basis.

Get Exam-Ready

Discretion questions reward candidates who can quickly tell whether the professional chose the asset, the action or the amount, and who know which written authority rule applies. Once “the three As” and “advisers get ten days, agents get none” are fixed, these become dependable marks.

The FRC dictionary is more than a dictionary. It is a library of explainer videos, written explanations and on-page quizzes covering the FINRA and SEC rules you are tested on, so you can open any term and go deeper whenever a question catches you out.

Study With FRC

FRC’s programs and memberships are open to everyone. Whether you are preparing for the Series 65, the Series 7, the SIE or a combination, structured exam preparation turns topics like discretionary authority into marks you can rely on.

FRC’s Professional Membership adds verified progress and a Digital Profile, so when you apply to advisory and brokerage firms, hiring managers can see your exam progress and the knowledge you are building, not just read about it on a resume.

Your Next Step

Discretionary authority is a client’s permission for a professional to choose the asset, action or amount of trades without approving each one. Investment advisers must obtain written authority within ten business days of the first discretionary trade, while broker-dealer agents need prior written authority and firm acceptance, and time and price decisions alone are never discretion.

Remember “the three As” and “advisers get ten days, agents get none,” and you will be ready for every version of this question the exam can ask.