Written by The White Law Group• June 22, 2025• 8:14 pm• Blog, Securities Fraud Articles

Discretionary Accounts: Does Your Broker Have Too Much Authority?

Jefferies LLC: Regulatory Review and Broker Misconduct Investigation

Typically, when investors hand control of their portfolios to a qualified professional, they hope for positive outcomes. However, how much freedom should your broker have? That question lies at the heart of what discretionary accounts are—a concept that can simplify your investing life or introduce unexpected (and unwanted) risks.

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Understanding the distinction between discretionary and non-discretionary accounts is crucial if you want to protect your assets and maintain control over your financial future. Some investors prefer having a professional take the reins. Others don’t. What’s right? Each option has its pros and cons.

What Are Discretionary Accounts?

In a discretionary account, the investor hands over control of trading decisions to a broker. This means the broker doesn’t need to call or email each time they want to make a move — they can buy or sell securities when they believe it’s the right time, based on the client’s overall strategy.

What are discretionary accounts in practice? In most cases, these accounts are used by investors who want a hands-off approach, either due to a lack of time, expertise, or interest. You put complete trust in your broker’s hands. Convenient? Yes. Risky? Sometimes.

The Risks of Broker Misconduct

There are times when an advisor, given the ability to make trades for you, might start acting in ways that raise concern. Maybe the moves they’re making don’t fit your overall goals, or perhaps they seem more focused on generating commissions than on managing your account responsibly. In some cases, it’s not just poor judgment—it crosses into misconduct.

Unfortunately for investors, discretionary accounts are often fertile ground for misconduct, underscoring the importance of working with a trustworthy financial professional.

Preventing Abuse as an Investor

To prevent broker fraud in discretionary accounts, it is essential to establish clear guidelines and controls, including:

Setting investment objectives and risk tolerance levels
Monitoring and reviewing account activity
Ensuring a broker acts in your best interest
Choosing a reputable broker or financial advisor with a track record of ethical behavior

Avoid giving too much discretion without clearly defined limits. Ask questions. Read every document thoroughly. Ensure you understand how a broker will manage your finances.

Some people just don’t have the time—or interest—to manage their investments. That’s where a discretionary account comes in. Instead of checking in for every decision, the broker handles things for you. It’s a good fit for individuals who prefer to stay out of the weeds but still want their money to work for them.

In a discretionary account, your broker’s job is to look out for you. They have to make choices that fit your goals and how much risk you’re okay with. Typically, this involves researching market trends, company reports, and the overall economy before making decisions. It’s part of the deal.

Managed accounts may have higher fees than non-discretionary accounts, as the broker assumes a greater level of responsibility for managing the account. However, the potential benefits include potentially higher returns and a more hands-off approach to investing.

Before opening a discretionary account, take some time to weigh the pros and cons. It’s important. Ensure you thoroughly understand how it works and what you’re signing up for. Also, choose a broker or advisor you trust—someone with a solid reputation, not one who advocates for buying and holding.

Discretionary vs. Non-Discretionary Accounts

Discretionary accounts and non-discretionary accounts differ in terms of who makes investment decisions.

Non-Discretionary Accounts: You retain complete control over your investments. Your broker can make suggestions, but they need your permission before executing any trade.
Discretionary Accounts: A broker can act without checking in with you.

In a non-discretionary account, the account holder retains complete control over the investment decisions. In this type of account, the investment advisor provides recommendations and advice to the account holder, but the latter party must make the final investment decisions.

FINRA Rules for Discretionary Accounts

Now that you know what discretionary accounts are, learning the authority that oversees them is also essential. FINRA (Financial Industry Regulatory Authority) oversees the securities industry and has rules regarding discretionary brokerage accounts. FINRA Rule 3260 governs these managed accounts and imposes specific requirements on broker-dealers and registered representatives.

FINRA rules make it clear: brokers can’t make discretionary trades without obtaining written consent first. That permission must outline what the broker is allowed to do and must be signed off by someone in a supervisory role. No shortcuts.

Advisors are expected to handle client funds with care, following the investor’s stated preferences, risk comfort level, and any additional instructions. No shortcuts allowed. It’s similar to a tailor adjusting a suit—you can’t cut corners and still expect a proper fit. Ongoing evaluations are also necessary to confirm that every move aligns with the broader financial vision.

FINRA also requires that brokers and dealers maintain records of discretionary trades, including the terms and conditions of the authorization, as well as the time and price of each trade.

These rules protect investors from fraudulent or unsuitable trading practices in discretionary accounts and ensure that brokers and dealers act in their clients’ best interests when exercising discretion.

Unauthorized Trading

While it is less common, unapproved transactions can potentially occur in a discretionary brokerage account if the broker or financial advisor exceeds the scope of their discretion or acts outside of the account holder’s investment objectives and risk tolerance.

For example, if the broker makes trades that are not consistent with your stated investment goals or if they exceed the agreed-upon level of risk, this could be considered making non-consensual trades. Similarly, if the broker engages in excessive trading in the account to generate commissions, this could also lead to non-compliant transactions.

Do you suspect unauthorized trading? Contact your broker or financial advisor immediately and file a complaint with FINRA. Consider consulting with a securities attorney to discuss potential legal options, such as filing a FINRA arbitration claim.

Discretionary vs. Non-Discretionary Accounts

Unapproved transactions can occur if the broker or financial advisor executes trades without your prior approval. For example, the broker may make trades in your account without your knowledge or consent, or they may misrepresent the nature or risks of the investment to obtain your approval.

Further, some brokers or financial advisors may engage in churning or excessive trading to:

Generate commissions
Make unsuitable investment recommendations
Engage in other fraudulent activities

Closely monitor account activity. Review trade confirmations. Look over account statements regularly. If you notice any unauthorized trading activity or suspicious behavior, you should contact your broker or financial advisor immediately and report the incident to the brokerage firm’s compliance department.

Protect yourself by:

Carefully reviewing an account agreement
Setting clear investment objectives
Only approving trades consistent with your investment goals
Choosing a reputable broker
Report any suspicious behavior or fraudulent activity

What Are FINRA’s Rules Regarding Unauthorized Trading?

This authority’s Rule 3260 specifically addresses the issue of discretionary accounts and the requirements for brokers and dealers to obtain written authorization from customers before exercising discretion in their accounts.

In addition to the previously mentioned regulation, this government agency has several other rules that apply to unauthorized trading, including:

FINRA Rule 2150 – Prohibits broker-dealers from using customers’ securities or funds for their benefit or making unauthorized withdrawals from customer accounts.
FINRA Rule 4512 – Requires broker-dealers to maintain accurate and up-to-date customer account information, including the customer’s investment objectives, financial situation, and risk tolerance.
FINRA Rule 4513 – Requires broker-dealers to maintain records of all written customer complaints, including those related to unauthorized trading.
FINRA Rule 5330 – Stops broker-dealers from adjusting or canceling a customer order without the customer’s consent.

If a broker engages in unauthorized trading, they may be subject to disciplinary action by FINRA, including fines, suspension, or even permanent expulsion from the securities industry. Customers who believe that unauthorized trading has occurred in their account may file a complaint with FINRA, which will investigate the matter and take appropriate action if necessary.

Frequently Asked Questions

How much higher are expenses on discretionary accounts?

Fees vary, typically based on the firm and account type. Often, discretionary accounts can include:

Asset management fees
Performance-based costs
Higher trading commissions

Due to the previously mentioned additional expenses, these accounts can incur significant fees.

What are examples of discretionary accounts?

These accounts exist in many forms, including:

Managed investment portfolios
Wrap fee programs
Private wealth accounts

Essentially, these accounts are any ones in which someone in an advisory role can make day-to-day decisions on behalf of their client without the client’s approval.

What are essential discretionary account questions for a broker?

Asking questions is a vital part of the investment process. If you want this type of account, potential questions to ask an advisor can include:

What is the scope of your discretion over my account?
How often will I receive account-related updates?
Can I place limits on your authority?

Get Help From Experienced Securities Attorneys

Have a securities-related dispute? The White Law Group may be able to help you. We’re a national securities fraud, securities arbitration, investor protection, and securities regulation and compliance law firm dedicated to assisting investors in claims against their financial professional or brokerage firm in all 50 states. Since its launch in 2010, it has handled over 800 FINRA arbitration cases.