Discretionary authority

Discretionary authority is written permission from a client allowing an advisor to make and execute investment decisions in the account without seeking approval for each transaction.

Granted in writing

Discretion comes from the advisory agreement and the custodian’s authorization. It is specific and limited to what those documents describe.

Why firms need it operationally

Without discretion, a change to a model portfolio requires contacting every affected client and obtaining approval before trading. At any scale that is not workable, and it guarantees that accounts trade at different times and different prices.

What it does not include

Discretion over investments is not authority to move money out of the account. Withdrawal authority is separate, is treated differently by regulators, and can trigger custody obligations with meaningful compliance consequences.

The obligation it creates

Discretion raises the documentation standard rather than lowering it. Because the client did not approve each decision, the file has to show why each decision was appropriate.

Why it defines AUM

Assets under management generally counts discretionary assets. Non-discretionary relationships usually fall under assets under advisement.