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Is a discretionary account right for you?

"Blue horseshoe loves Anacott Steel": These are the words that triggered a buying frenzy in the original Wall Street movie that saw buy order after buy order pile up as brokers young and old furiously called their clients desperate to get them in on the action.

What if you weren't by your phone? Wouldn't it have been nice to know that your adviser could just make that judgment call for you and get in right away before the price sky-rocketed and the "easy" gains were made? That could only have happened if you had what's known as a discretionary account.

Aside from the fact that this fictional example was wrought with other complications - like legalities and ethics - there are times when deferring trading decisions to your adviser can make a lot of sense. Maybe you're a neurosurgeon and you would feel a bit guilty taking your adviser's call during a craniotomy, for example. In that case, if you've decided to take an active trading strategy with your account, you can just defer the individual trade decisions to your adviser - you give them the discretion to act on your behalf.

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There are many other reasons why a discretionary account makes sense. Some people just have no idea what language their adviser is speaking when they are making recommendations. If you have simply agreed with every recommendation your adviser has made for the last 10 years, perhaps it's time to skip the formality of the phone calls and make everyone's lives easier.

This requires trust, and you can still set out the general parameters of how you want your account managed. You can tell your personal portfolio manager that you don't want to invest in tobacco companies, or you don't want to go near junk bonds, or that you want half of your holding always in T-bills, if you so desired.

One of the other advantages comes from the mechanism of trade execution. If a portfolio manager decides to buy stock XYZ for every client, they may be able to execute one large block trade. Instead of entering in 100 transactions for 100 accounts, they can execute one trade, and then divide the shares into each client account after the fact. Everyone gets the same price, no preferential treatment. If the adviser had to do it the other way, and you were client 98 out of 100, then buying stock XYZ all day could push the price up if the liquidity wasn't ideal. (Realistically, an adviser in the latter situation might spread out the purchases over many days or even weeks to avoid that.)

If you are interested in discretionary accounts, the first thing you'll need is an adviser who is registered with their provincial securities commission to engage in discretionary portfolio management. The second thing you'll need is a sizable portfolio, as the client minimums tend to be higher for this type of service (around $250,000+). There's extra paperwork involved since the industry takes these relationships very seriously. The flipside is that the educational and experience requirements to be a portfolio manager are very high. Non-registered accounts potentially benefit from tax-deductibility of the client advisory fee, which is a bonus.

The Portfolio Management Association of Canada has more information, as well as links to firms that provide discretionary services. Discretionary accounts are not right for everyone, nor do they require you have an active trading strategy. Fees vary, and some managers charge performance fees on top of a fixed percentage fee. The delegation of such authority warrants taking extra time to find a discretionary account manager, but it can be just what the doctor ordered for some investors.

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About the Author
Personal Finance columnist

Preet Banerjee is a consultant to the financial services industry. You can follow him on twitter at  @PreetBanerjee. You can find his conflict of interest disclosure on his website. More

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