“Discretion” is usually thought of as the quality of being discreet; circumspection, being prudent. In the investment industry the word means something different and is often misunderstood by clients.
A “discretionary account” is an account in which an advisor is empowered to buy and sell without the client’s prior knowledge or consent.
As an RIA, prior to engaging with a client we present them with an advisory agreement that specifically allows us to make buy or sell decisions without first consulting them. Most of our clients hire us to manage their portfolios using our professional judgement and expertise to achieve their individual objectives. To use an analogy, think of us as the foreman of a ranch. Our clients are the ranch owners; they hire us to manage it for them. If they don’t like the results they can fire us and hire somebody else. This wortks out so well that many of our clients have introduced us to their friends and relatives.
For those who look up the definition of “discretion” in the dictionary, they will find the following: “Ability or power to decide responsibly; Freedom to act or judge on one’s own” That’s what we mean when we use the word discretion.