What Is a Discretionary Order?
Let me explain what a discretionary order is—it's an order condition that gives your broker some latitude in how they execute it, including aspects like timing and price. You might also hear it called a not-held order.
Key Takeaways on Discretionary Orders
When you place a discretionary order, your broker gets some leeway to handle it on your behalf without needing your express permission for every single decision or detail. This discretion often comes with conditional orders, where the broker can adjust things like the limit price based on shifting market conditions.
Discretionary orders play a big role in discretionary investment management, where a broker or advisor makes trades for you without checking in on every action. Importantly, these orders protect the broker from liability for potential losses, as long as they're using their discretion to aim for the best execution possible.
Understanding Discretionary Orders
In broader terms, a discretionary order lets a broker or financial professional place and work an order without your explicit acknowledgment. These orders expand on standard conditional orders to increase the chances of execution. They help get your order filled while still letting you set some constraints.
You can add a discretionary component to common conditional orders, like limit orders and stop loss orders. This is a simple provision where you include a discretionary amount with your order. If you give a broker a limit order with discretion, they can tweak the limit price based on market activity and liquidity when the order arrives.
You can place these orders through electronic systems or directly with a broker. In either case, you specify a conditional order with a discretionary amount, usually in cents, which gives the order extra room to execute beyond the standard conditions. Broker-dealers treat these as special orders and monitor them to submit at the best price for you.
Discretionary orders depend on what your broker-dealer allows. If available, you can usually add them to various order types. Sometimes, you might add a discretionary amount to a single-day order, or even to good 'til canceled (GTC) orders that stay open until you cancel them.
Examples of Discretionary Orders
Many investors add a discretionary amount to basic buy and sell limit orders. A limit order lets you pick a specific price to buy or sell a security—buy limits are below the market price, and sell limits are above it.
For a discretionary buy limit order, you'd set a price below the market and add a discretionary amount. Say you place a buy limit at $20 on a stock trading at $22, with a 10-cent discretionary amount—that means you're okay buying at $20 up to $20.10. If the price drops to $20.10, the order gets submitted and executed.
On the sell side, a discretionary sell limit order sets a price above the market with a discretionary amount. If you set a sell at $24 on a stock at $22 with 10 cents discretion, the order could execute at $23.90 or higher.
Discretionary Investment Management
Discretionary investment management involves a portfolio manager or investment counselor making buy and sell decisions for your account. The 'discretionary' part means they decide at their own discretion, so you need to trust their abilities completely.
Only experienced professionals with advanced credentials in the investment industry can offer this. It's usually for high-net-worth clients with substantial investable assets.
To use this, you need a discretionary account, which lets an authorized broker trade securities without your consent for each trade. You'll sign a discretionary disclosure to document your consent. These are also called managed accounts, often with minimums like $250,000, and fees of 1% to 2% per year on assets under management.
