Advisory agreements generally contain a passage covering discretion. It tends to attract little attention during onboarding, although it shapes a good deal of how the relationship runs afterward.
The clause establishes who may act, how quickly, and within what boundaries. Much of the rest of the document covers services and fees. This passage covers authority, which is a separate question.
Two Levels of Authority
Arrangements in this field tend to fall into one of two categories. The difference concerns permission to act.
Under a non-discretionary arrangement, the firm researches, recommends, and explains. The client approves each transaction before it takes place, and nothing proceeds without that approval. Routine work still happens, though each step waits for a decision, which may introduce delay when markets move quickly or when the client is unreachable.
Under a discretionary arrangement, written authority is granted in advance and the firm acts within agreed parameters. Rebalancing happens on schedule, tax-loss harvesting occurs when the opportunity appears, and manager changes proceed without approval being sought for each transaction. The work is reported afterward rather than approved beforehand.
Neither is better in the abstract. They suit different circumstances and different temperaments. The choice is not always binary. Authority can be granted over part of a portfolio and withheld elsewhere. Where that split applies, the agreement should name which holdings fall on each side.
Why the Labels Settle So Little
Terminology varies between firms. Investment advisory services and investment management services are sometimes treated as interchangeable. They are sometimes used to separate planning work from portfolio execution.
Because the labels are not standardized across the industry, the agreement rather than the name defines the authority actually granted.
Four Points to Examine Before Signing
- The limits rather than the grant alone. Discretionary authority is rarely unlimited. The agreement should specify what may be traded, what cannot be touched without consultation, and whether anything is excluded entirely.
- What prompts contact. Some firms get in touch before doing anything out of the ordinary. Others report afterward and rely on scheduled reviews. Both approaches are defensible, and knowing which one applies prevents surprises in a volatile week.
- How performance is presented. Figures shown gross of fees look different from figures shown net of them. Reporting that includes both, alongside a stated benchmark and period, is easier to interpret than a single headline number. Statement frequency is worth settling in the same conversation, since a quarterly statement and a live portal represent different levels of visibility.
- The revocation process. Authority granted in writing can normally be narrowed or withdrawn in writing. Knowing that process in advance makes the exit route part of the original decision.
Matching the Structure to the Circumstances
The choice usually comes down to involvement and available time.
Someone with market experience and open hours may want each recommendation explained before approving it. Someone with an unpredictable schedule may prefer decisions made inside agreed limits and reviewed each quarter.
Neither profile is unusual, and firms tend to accommodate either one. The point is to match the mandate to the way a client actually works.
Firms providing investment management services should be able to state which arrangement is on the table and how it can be changed later.
Difficulty arises when the arrangement sits at odds with the preference. A client seeking close involvement under a discretionary mandate may feel distant from the portfolio. A client who travels constantly under an approval-based mandate may slow their own account without intending to.
What Both Arrangements Share
Certain obligations attached to investment advisory services do not change with the level of authority granted. A registered firm is required to disclose material conflicts in its regulatory filings. Fees belong in the agreement. Reporting should reflect what has actually taken place in the account.
The discretion clause alters the sequence of decisions rather than the standard applied to them. Holding that distinction in mind keeps the comparison narrow and makes the trade-off easier to assess.
Confirming It in the Document
The distinction between these arrangements is not presentational. It determines who can act and under what constraints, and it belongs in the written agreement rather than in conversation alone.
An answer that refers to a client’s own circumstances is easier to check against the document than a general description. Reading the agreement alongside the firm’s regulatory filings can confirm whether the description matches what has been committed to paper.
This article is for informational purposes only and does not constitute investment, tax, or legal advice.
