What is a Discretionary Order?
Discretionary orders are transactions that are made on behalf of an investor without receiving specific permission to initiate the transaction. Brokers and portfolio managers may enter a discretionary order only if the investor has provided prior authorization for an order of this type to take place. Often, the ability to issue a discretionary order is provided by establishing a formal power of attorney that allows the broker to legally initiate trading activity on behalf of a client.
With a discretionary order, the broker does not have to consult the investor before making any type of trade involving the investor account. The broker is free to buy and sell any type of investments covered in the terms and conditions of the power of attorney. This means the broker does not have to confer with the investor on matters such as the current price of various stocks, or alert the investor to the level of risk involved with any one transaction.
There are a couple of key advantages to this type of arrangement. A broker who has the ability to place a discretionary order is able to move quickly with trading activity. This means that if there is a particular investment opportunity that will only be available for a very narrow window of time, the broker can act quickly. As a result, the investor stands to realize a return on an investment that may not have been possible had the broker have to spend time locating the investor, explaining the deal in detail, and obtaining permission to execute the order.
A second benefit to allowing a broker to place a discretionary order is that the investor does not have to be involved in the day to day decisions of what to buy and what to sell. With a professional broker handling all the details, the investor is free to focus on other matters, such as career and family. This makes it possible for the investor to rest assured the portfolio is growing and devote the time and effort that would otherwise be required to effectively manage a portfolio to other worthy causes.
Even with a discretionary order arrangement in place, the investor is always free to check the current status of his or her portfolio, or talk with the broker about how the account is being managed. The investor can also alert the broker to a particular investment opportunity that looks promising and thus have the broker place the order. However, the use of a discretionary order approach makes it possible for the investor to only be involved in financial decisions when and as the investor wishes.
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