Discretionary vs. Non-Discretionary Investment Management

When you're launching your own Registered Investment Adviser (RIA), you'll make dozens of decisions that shape how your firm operates. One of the most important is whether you'll manage client accounts on a discretionary or non-discretionary basis.

There's no universal "right" answer. The best approach depends on your investment philosophy, service model, compliance obligations, and even the state where your firm is registered.

Before you check the box on your registration paperwork, it's worth understanding what discretionary authority means, how it affects your day-to-day operations, and what additional regulatory requirements may come with it.

What Is Investment Discretion?

Discretionary investment management allows an adviser to buy or sell securities in a client's account without obtaining approval before every transaction. Instead, the client grants that authority in writing through the advisory agreement.

Without discretionary authority, every trade requires prior client authorization. Even if you've already discussed your investment strategy, you'll still need the client's approval before executing transactions unless you've been granted discretion.

For many firms, this decision affects much more than trading. It influences compliance responsibilities, operational workflows, client experience, and, in some states, registration requirements.

When Does Discretion Make Sense?

Discretionary authority is often a good fit for firms that actively manage portfolios or employ investment strategies that require timely execution.

For example, if you're rebalancing portfolios after significant market movement or implementing tax-loss harvesting opportunities, waiting to contact every client before placing trades can create unnecessary delays. By the time approvals are received, market conditions may have changed.

Discretion allows advisers to act efficiently while remaining aligned with the investment strategy the client has already approved.

That said, discretion also comes with added responsibility. Clients are placing significant trust in their adviser, making clear communication, documented investment policies, and ongoing oversight even more important.

When Non-Discretionary Management May Be the Better Fit

Not every advisory firm needs discretionary authority.

Many firms that follow long-term, passive investment strategies or conduct infrequent portfolio changes operate successfully on a non-discretionary basis. Advisors who prioritize collaborative decision-making may also prefer involving clients in every investment decision.

The tradeoff is operational.

Every recommendation must be approved before execution, which means additional meetings, phone calls, emails, or electronic authorizations. While modern custodians and digital workflows have streamlined much of this process, documenting client approval remains an essential compliance responsibility.

Documenting Client Authorization

For non-discretionary accounts, documenting client authorization isn't optional. Regulators expect firms to demonstrate that trades were approved before they were placed.

Strong documentation generally includes:

• Complete trade blotters are maintained through your custodian or portfolio management software
• Detailed CRM notes documenting conversations and client approvals
• Email records or electronic approvals when applicable
• Consistent procedures for documenting verbal authorizations

Fortunately, today's advisor technology makes this process much easier than it once was. Many custodians, portfolio management systems, and customer relationship management (CRM) platforms automatically retain much of the information firms previously tracked manually. Your firm's written procedures should explain how these records are maintained and where they're stored.

Understanding Net Capital Requirements

One of the most overlooked considerations when choosing discretionary authority is how it may affect your state registration requirements.

Many state securities regulators require firms with discretionary authority to maintain minimum net capital. Depending on the state, those requirements can range from a few thousand dollars to substantially more.

Some states allow firms to satisfy these requirements through a surety bond, while others require sufficient assets, typically cash, on the firm's balance sheet.

Because these rules vary significantly by state, it's important to understand your state's specific requirements before deciding whether discretionary management makes sense for your firm. Reviewing your state's registration requirements early in the planning process can help you avoid unexpected delays during registration.

Your Advisory Agreement and Form ADV Must Match

If your firm offers discretionary management, that authority should be clearly documented in your client advisory agreement.

Just as importantly, your advisory agreement should be consistent with the disclosures made in your Form ADV Part 2A. If one document indicates the firm has discretionary authority while the other does not, regulators may view the inconsistency as a compliance deficiency.

Whenever you add or remove discretionary authority from your business model, review both documents together to ensure they accurately reflect how your firm operates.

The Bottom Line

Discretionary authority isn't simply a compliance checkbox. It's a decision that affects how you serve clients, manage portfolios, and operate your firm every day.

For some advisors, discretion creates a more efficient client experience and allows investment decisions to be executed when timing matters. For others, a non-discretionary approach better aligns with their planning philosophy and desire for ongoing client involvement.

Before making the decision, consider your investment process, technology, compliance obligations, and your state's registration requirements. Taking the time to evaluate these factors upfront can help you build an advisory firm that's both compliant and designed to support the way you want to serve clients.