In the investment world, “discretion” is the action of a financial advisor making some or all decisions on behalf of a client. The most obvious example of discretion is when an advisor chooses the type of security and the amount of money invested by the client.  However, provincial securities regulators also consider the following cases to require some level of discretion on the part of the advisor:

• The advisor recommends that the client purchase a security and the client agrees.  The advisor then exercises discretion in choosing the number of shares or units to purchase in the security and at what price.
• The client instructs the advisor to purchase shares or units of a security, but leaves it to the advisor to determine the best time to make the investment. The advisor then exercises discretion in picking the timing of the purchase.
• The client subscribes to a service that triggers a “buy” or “sell” signal, authorizing the advisor to take action based upon notification from that service.  The advisor then exercises discretion when making a purchase or sale based upon this signal, and not upon the circumstances of the client at the time of the signal.

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When clients give their financial advisor discretion over their investments, they depend on the integrity and competence of the advisor. To safeguard investors from possible wrongdoing, regulators require the discretionary investment advisor to have a higher level of training and education in the investment field. Likewise, under our legal system that advisor has an obligation to offer a higher standard of care to a client. This is known as a fiduciary duty. Failure to fulfil a fiduciary duty is a regulatory offence and can form the basis for a lawsuit.

In healthy client-advisor relationships, highly-trained investment professionals can do a better job of investing money than can most individual clients. They can also manage a portfolio for a lower fee than those associated with individual mutual funds and commission salespeople. However, this service comes with a risk, and investors should always consider this risk before handing control of their money over to an advisor.

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Investors who see the market as complex and mysterious tend to think there is some sort of “magic” involved in making good investments, and are afraid to make decisions themselves. At the same time, many of them distrust investment professionals, fearing they are opportunists – just salespeople working to make a buck for themselves, regardless of what happens to their clients’ financial security.

This is the discretionary investment dilemma. However, for investors willing to do their homework and keep on top of their investments, the mystery and “magic” of the market can become far less intimidating.

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