Understanding Discretionary vs Non-Discretionary Accounts for RIAs

Most advisors manage both discretionary and non-discretionary accounts across their client book without a clear framework for handling each differently. The account type determines the scope of the advisor’s authority, the documentation required at every stage of the relationship, the supervisory obligations that apply to every trade, and the compliance exposure the firm carries when something goes wrong.

This post covers what each account type means under current regulations, how the obligations differ, where the compliance risks concentrate, and how to build a workflow that handles both correctly.

What Is a Discretionary Account?

A discretionary account is an investment account in which the client grants written authorization to an advisor or broker to make investment decisions, including security selection, timing, price, and quantity, without obtaining the client’’s approval for each transaction.

Under FINRA Rule 3260, no member or registered representative shall exercise any discretionary power in a customer’s account unless such customer has given prior written authorization to a stated individual or individuals and the account has been accepted by the member, as evidenced in writing by the member or the partner, officer, or manager duly designated by the member in accordance with Rule 3110.

The written authorization must predate the first discretionary trade. Verbal authorization is not sufficient under FINRA Rule 3260, and the authorization must specify the scope of discretion granted.

FINRA Rule 3260 also bans the practice of engaging in transactions that are excessive in size or frequency, given the character and resources of the account, covering the practice of churning, where broker-dealers complete numerous transactions that do not further the client's financial interests.

For RIAs operating under the Investment Advisers Act of 1940, discretionary authority is typically granted through the investment advisory agreement at account opening. The scope and limits of that authority must be clearly documented.

On fiduciary duty in discretionary accounts:

Whether a broker-dealer owes a common law fiduciary duty in a discretionary account is a question of state law and is legally contested across jurisdictions. The Reg BI obligation is a separate federal legal obligation from the question of whether a broker-dealer may owe a fiduciary duty under state common law.

For example, where the broker-dealer exercises discretion or control over customer assets. RIAs registered under the Investment Advisers Act of 1940 owe a fiduciary duty to clients regardless of account type, as established in the SEC’s 2019 Interpretation of an Investment Adviser’s Fiduciary Duty (Release No. IA-5248).

What is a Non-Discretionary Account?

A non-discretionary account is an investment account in which the client retains decision-making authority over every trade. The advisor recommends, but the client must provide explicit consent before each transaction is executed.

Absent written authorization to make discretionary trades, a broker must discuss any trades with their client and obtain the client’s consent before conducting any trades.

In a non-discretionary account, the advisor’s obligation is to the quality of the recommendation at the time it is made, not to the execution decision. The client may accept, modify, or reject each recommendation. The advisor’s suitability record must document that the recommendation was appropriate for the client’s profile, regardless of what the client ultimately does.

On fiduciary duty in non-discretionary accounts:

For broker-dealers, Regulation Best Interest, effective June 30, 2020, imposes a standard of conduct that requires brokers to act in the best interest of their clients when making recommendations about securities transactions or investment strategies.

Reg BI imposes a heightened standard of care at the time of a recommendation to a retail customer and does not impose an ongoing duty to monitor existing accounts, contrasting it with the fiduciary duties of investment advisers. For RIAs, fiduciary duty under the Advisers Act applies to the advisory relationship regardless of whether the account is discretionary or non-discretionary.

Time-and-price discretion is a limited form of non-discretionary authority that allows the advisor to determine when and at what price to execute an order the client has already approved. This does not constitute full discretionary authority under FINRA Rule 3260 and does not require the same written authorization.

Discretionary vs Non-Discretionary Accounts: A Direct Comparison

How Account Type Affects RIA Compliance Obligations

The account type changes not just what authority the advisor has but what the firm must document, monitor, and supervise across the entire client relationship.

Discretionary accounts

Every trade placed in a discretionary account must fall within the written scope of authority granted by the client. Trades outside that scope are unauthorized regardless of whether they were profitable or consistent with the client’s general objectives. The advisor does not get credit for a good outcome if the trade was outside the authority granted.

Suitability and Reg BI obligations under the Securities Exchange Act apply to the discretionary decision itself, not just to an initial recommendation. The advisor is accountable for the outcome of each trade decision made under discretionary authority.

Churning risk is materially elevated in discretionary accounts because the advisor controls trade frequency without needing client approval for each transaction. No member shall effect with or for any customer’s account in respect to which such member or his agent or employee is vested with any discretionary power any transactions of purchase or sale which are excessive in size or frequency in view of the financial resources and character of such account. This is a specific prohibition under FINRA Rule 3260 that applies only where discretionary power exists.

Concentration risk requires active monitoring in discretionary accounts. The advisor’s decisions directly determine portfolio positioning, so concentration breaches are the advisor’s supervisory responsibility. A concentrated position that developed under discretionary management without documented review is a supervision gap that belongs to the firm.

Rule 3260 requires brokerage firms to approve any discretionary accounts and review an account at regular intervals to ensure that the transactions are not excessive.

Additionally, when a broker does take discretionary action in a client’s account, there’s an additional layer of oversight that needs to take place:

The broker-dealer must promptly approve all transactions and will regularly review all transactions within the account to detect and prevent excessive transactions that do not fall in line with account objectives and financial resources.

Non-Discretionary Accounts

Each recommendation must be documented as suitable at the time it is made, regardless of whether the client follows it. The suitability record must exist before the client’s response, not be created based on what the client decides to do.

Reg BI requires that when making a recommendation to a retail client, a registered representative must exercise reasonable diligence, care, and skill to understand the potential risks, rewards, and costs associated with the recommendation. This obligation applies to every recommendation in a non-discretionary account. Client consent to a trade does not transfer the suitability obligation. A client who instructs a trade outside their risk profile does not release the advisor from the duty to document the suitability assessment and state the recommendation at the time.

The unauthorized trading risk runs in the opposite direction in non-discretionary accounts. Any trade executed without the client's explicit consent is an unauthorized trade, one of the most frequent sources of FINRA arbitration claims, regardless of the trade’s merits.

IPS and Risk Profiling: How Account Type Changes the Workflow

The IPS and risk tolerance assessment serve different functions depending on account type. Understanding that difference prevents documentation gaps that frequently appear in SEC and FINRA examinations.

Discretionary Accounts

The IPS is the governing document for every investment decision made under discretionary authority. If the portfolio drifts outside IPS parameters and no documented supervisory review exists, the compliance gap belongs to the firm, not the client. A client in a discretionary account did not create that drift. The advisor did.

The risk tolerance assessment must be current, documented, and connected to the portfolio positioning at all times. A stale risk profile in a discretionary account creates suitability exposure that the firm cannot attribute to client instruction.

Continuous behavioral check-ins between formal assessments are particularly important in discretionary accounts because the client is not approving individual trades. The advisor must proactively identify when client circumstances or risk composure have shifted.

Non-Discretionary Accounts

The investment policy statement and risk profile serve as the reference point for evaluating each recommendation. When the advisor recommends a trade, the suitability documentation must show that the recommendation was consistent with the client’s documented profile at that time. If a recommendation diverges from the profile, that divergence must be documented and justified in writing, regardless of whether the client follows the recommendation.

Client consent to a trade outside their risk profile does not satisfy the suitability documentation requirement. The advisor's assessment of suitability at the point of recommendation must exist independently of the client’s decision.

Which Account Type Is Right for Which Client?

This is an operational judgment, not a compliance determination. The right account type depends on the client’s preferences, engagement level, and the nature of the advisory relationship.

Factors indicating discretionary management is appropriate:

• The client explicitly delegates investment decision-making and prefers not to be involved in individual trades.
• The client’s schedule or engagement level makes per-trade approval impractical or creates unnecessary delay.
• The advisor is managing a model portfolio strategy across multiple similar accounts where per-trade approval would undermine consistency.
• The client has a long-term horizon with limited near-term liquidity needs that would require urgent trading decisions.

Factors indicating non-discretionary management is appropriate:

• The client wants to remain actively involved in investment decisions and views participation as part of the value they receive.
• The client has strong views on specific securities, sectors, or investment approaches that require case-by-case input.
• The client has unique tax circumstances where each trade decision has individual tax implications that warrant client review before execution.
• The client is particularly sensitive to portfolio changes and wants visibility before they occur.

Managing a mixed book: Many RIAs manage both discretionary and non-discretionary accounts across their client base. The compliance workflow for each account type is different. Running a mixed book without a system that distinguishes documentation requirements by account type creates coverage gaps in the supervisory record.

Both the IPS and the risk profile need to be maintained with the account type in mind, because the obligations connected to each document differ depending on whether the account is discretionary or not.

6 Operational and Documentation Best Practices for RIAs Managing Both Account Types

1. Document the account type designation at onboarding. Written authorization must predate the first discretionary trade.
2. Connect every discretionary trade record directly to the client’s IPS and risk profile.
3. Document each non-discretionary recommendation separately, regardless of whether the client follows it.
4. Reassess risk tolerance and update the IPS at defined intervals for both account types.
5. Monitor discretionary accounts continuously for churning, concentration risk, and IPS drift.
6. Update written authorization before any account type designation change takes effect.

The last best practice carries its own compliance significance. If a non-discretionary relationship transitions to discretionary management at any point, the written authorization must be executed, signed, and dated before any trade is placed under the new arrangement.

A transition that happens informally, where the advisor begins making trades without obtaining updated authorization, creates unauthorized trading exposure from the date of the first trade placed without authorization.

How StratiFi Supports RIAs Managing Discretionary and Non-Discretionary Accounts

StratiFi’s platform addresses three specific points where account type creates compliance documentation risk.

Risk profiling connected to the account type

AdvisorIQ’s risk profiling workflow applies to both account types. For discretionary accounts, the documented risk profile is the foundation of every trade decision made under discretionary authority.

For non-discretionary accounts, it is the reference point for every suitability assessment. In both cases, a current, documented, and accessible risk profile is the starting point for a defensible compliance record.

Continuous behavioral check-ins within AdvisorIQ are particularly valuable for discretionary accounts where the advisor acts without per-trade client approval and needs current composure signals to make appropriate decisions.

Trading activity monitoring

ComplianceIQ monitors discretionary accounts for churning and reverse-churning patterns, specifically the trading activity and inactivity signals that represent the elevated risk profile of discretionary management.

The advisor’s control over trade frequency in a discretionary account makes this monitoring obligation direct rather than advisory, and continuous monitoring produces the supervisory record that FINRA Rule 3110 and Rule 3260 require.

IPS generation and documentation

StratiFi generates e-signed IPS documents that serve as the governing framework for discretionary account management, creating a documented, timestamped record of the client’s investment mandate that predates the first discretionary trade.

For non-discretionary accounts, the same IPS serves as the documented reference point against which each recommendation suitability is assessed.

If you want to know more about how StratiFi supports RIAs managing both discretionary and non-discretionary client relationships, book a demo today.

Summing Up

The distinction between discretionary and non-discretionary accounts is not a labeling exercise. It changes the fiduciary and regulatory obligations at every stage of the client relationship, the documentation that must exist before and after each trade, the supervisory monitoring the firm must run continuously, and the exposure the firm carries when something goes wrong.

RIAs managing a mixed book need a clear operational framework for each account type. The documentation requirements are different. The supervision standard is different. The risk of getting either wrong falls on the firm either way.

FAQs

What is a discretionary account?

A discretionary account is an investment account in which the client grants prior written authorization for an advisor or broker to make trading decisions, including security selection, timing, price, and quantity, without obtaining client approval for each individual transaction.

What is a non-discretionary account?

A non-discretionary account is an investment account in which the client retains decision-making authority over every trade. The advisor recommends, but the client must explicitly consent to each transaction before it is executed.

What is the difference between discretionary and non-discretionary accounts?

The core difference is who has the authority to execute each trade. In a discretionary account, the advisor acts under written authorization to trade without per-trade approval. In a non-discretionary account, the client must consent to each trade. The account type determines the applicable supervisory obligations, documentation requirements, and compliance exposure for the firm.

What is discretionary portfolio management?

Discretionary portfolio management is the practice of managing client investments under written discretionary authority, where the advisor makes security selection, allocation, and trading decisions within the parameters of the client’s investment policy statement and risk profile without requiring client approval for each transaction.

What written authorization is required to open a discretionary account?

Under FINRA Rule 3260, the customer must provide prior written authorization to a stated individual or individuals, and the account must be accepted by the member firm, as evidenced in writing by a partner, officer, or manager duly designated by the firm. The authorization must predate the first discretionary trade.

What is time-and-price discretion?

Time-and-price discretion is a limited form of non-discretionary authority that allows the advisor to determine when and at what price to execute an order the client has already approved. It does not constitute full discretionary authority under FINRA Rule 3260 and does not require the same written authorization as a discretionary account.

Does Reg BI apply to non-discretionary accounts?

Yes. Regulation Best Interest, effective June 30, 2020, requires broker-dealers to act in the best interest of retail customers when making a recommendation, regardless of account type. Reg BI applies to recommendations in both discretionary and non-discretionary accounts.

What are the compliance risks of discretionary account management?

The primary compliance risks are churning (excessive trading given the account's character and resources), concentration risk that develops without documented supervisory review, IPS drift that occurs without a documented rationale, and unauthorized trading where trades exceed the scope of the written authorization.

How does account type affect suitability documentation requirements?

In discretionary accounts, suitability documentation must connect each trade decision to the client's current risk profile and IPS parameters. In non-discretionary accounts, suitability documentation must record the advisor's assessment at the time of each recommendation, separately from the client's decision whether to follow it.

Can an advisor switch a client account from non-discretionary to discretionary?

Yes, but the written authorization must be executed, signed, and dated before any trade is placed under the new discretionary arrangement. Any trade placed without updated authorization after an informal transition to discretionary management constitutes unauthorized trading from the date of that trade.