Discretionary vs Non-Discretionary Investing: Who Can Approve Each Decision?

The difference is the timing of permission. Under a discretionary investment mandate, an authorized manager can make specified investment decisions within agreed limits without asking the client to approve each trade. In the non-discretionary advisory arrangement considered here, the adviser recommends a trade and obtains the required approval from an authorized client decision-maker before acting. Neither label, by itself, tells a US family office who may commit a trust to a private fund, change a bank beneficiary or sign for an entity.

Set the boundary for each account, asset class and action. Then write down who checks the limits, who acts, who sees an exception and what happens when an approval cannot be obtained in time.

01The Difference Is Who Can Act Before Approval

In a discretionary account, the family agrees a mandate in advance. The manager can then trade within its boundaries without obtaining a separate yes for each eligible order. The family still sets objectives and restrictions, receives information and reviews results. Delegation changes the point of approval, not the need for oversight.

In the approval-required service described here, a non-discretionary managed account lets an adviser recommend a trade while the specified client decision-maker approves or declines that proposal before the adviser acts. The exact process follows the account agreement. The office needs a workable way to receive the proposal, check it against policy, document the decision and communicate it to the person authorized to execute. “The family is involved” is too vague when markets move or a principal is unavailable.

The table describes investment authority, not a universal legal classification. For a FINRA member firm, Rule 3260 has specific requirements for exercising discretionary power, including prior written customer authorization to stated individuals, written firm acceptance, prompt written order approval and review of all discretionary accounts at frequent intervals to detect excessive transactions. The rule has specified exceptions, such as limited time-and-price discretion. Do not apply that broker-dealer rule mechanically to every investment adviser or family-office team. Check the particular firm's role, account documents and applicable requirements.

Nor does non-discretionary mean “no adviser responsibility.” The SEC's investment-adviser fiduciary interpretation says an adviser's duty applies in a way that reflects the agreed scope of the relationship; the advisory relationship remains fiduciary. What the adviser has agreed to recommend or monitor matters in either model.

This is general information, not legal or investment advice. Counsel and the relevant firms should check the actual agreements, entity authority and applicable rules before powers change.

02Which Powers Does the Mandate Actually Delegate?

An office can have several account owners, managers and approval bodies. One principal might approve public-market strategy, a trust committee might approve a private investment, and a separate authorized signer might instruct the bank. A single “discretionary” checkbox cannot describe all those powers.

For the separate question of which entity can act and which document controls, see our family-office legal-structure guide.

1Trading, Entity and Cash Authority Are Separate

Before appointing a manager, list each legal owner and account. For each, ask who may propose an investment, approve it, place an order, sign an agreement, instruct a transfer and release a family report. These verbs are different. A manager allowed to rebalance listed securities is not thereby authorized to commit a trust to a new private fund or redirect cash to a new beneficiary.

The office should also separate investment selection from custody. If an adviser has authority over investment choices, confirm what the custodian and bank will actually accept from that adviser, which disbursements require an entity signatory, and how any account restrictions are enforced. Do not infer cash-movement rights from the investment-management label.

2What the Agreement and Investment Policy Must Specify

An investment policy statement can explain objectives and guardrails. The signed management agreement and account authorizations define investment and account powers; entity or trust governing documents, subscription requirements and bank mandates may assign separate signing and payment powers. Read them together and resolve conflicts before the first trade. At a minimum, the office should identify:

• The accounts, legal owners and asset classes covered by each mandate.
• Allowed actions and exclusions, including private investments, derivatives, leverage or tax-sensitive transactions where relevant.
• Exposure or concentration limits, liquidity needs and any reserved family decisions.
• Who checks the mandate before an order, who handles a breach and who can amend the authority. Distinguish a pre-trade limit from a monitoring threshold: a market-driven breach needs its documented escalation and remediation route, not an assumed permission to place a corrective trade.
• Approval format, time limit, record location and backup approver for non-discretionary decisions.
• Reporting cadence, exception escalation and the documents needed for independent review.

Avoid policy prose that merely says “subject to the family's investment objectives.” A usable rule tells a manager and a reviewer whether a proposed action is permitted today, for this account, at this size. It also identifies what happens when a threshold is reached. Thresholds and allocation bands in the following case are illustrative; a family's actual limits belong in its signed documents.

For discretionary orders only: “Yes” requires current account/order scope, limits, restrictions and an authorized channel. The No branch is a stop, not permission to bypass a failed check. In the separate non-discretionary service described here, the client approves before adviser action. Trust subscription and cash instructions need their own authority; approval cannot enlarge the public-markets mandate. View the full-width desktop diagram.

03Two Decisions, Two Approval Paths

Consider an illustrative US family office with a $20 million public-markets account held by a family investment entity. Its signed mandate lets an external manager rebalance listed equities and bonds, provided the account's public-equity allocation remains within 45% to 60% and no restricted security is bought. The manager has no cash-transfer authority under the separate bank arrangements. For this example, the family investment committee reviews new private-fund proposals, while the trust's authorized trustees make the commitment decision and its designated signatory signs the subscription under the trust documents. The numbers and governance are a test fixture, not a recommendation or a statement about any particular family's documents.

1A Routine Rebalance Inside the Mandate

Assume public equities are $11.6 million, or 58% of the account, and the manager proposes selling $400,000 of equities and buying $400,000 of bonds. Ignore market movement and transaction costs for this illustration. Equities would become $11.2 million, or 56%, inside the 45% to 60% band. The manager also checks the actual holdings, restrictions, liquidity and available trading authority before acting; the arithmetic alone is not permission.

If the relevant figures are stale, a restricted holding is involved or the manager cannot show that the entity's account is covered, neither path earns a pass. The office should resolve the exception rather than let the label supply missing authority.

The benefit of discretion here is operational: an in-scope rebalance need not wait for a family meeting. That route depends on clearly drafted limits, timely exception information and independent review. The benefit of a non-discretionary path is that the authorized family side decides each trade; it also creates an approval workload and possible delay. Both routes need oversight. Neither guarantees better returns or a lower total fee.

2A Private-Fund Commitment Outside the Mandate

Suppose the office separately engages the same firm to advise on a new $1 million private-fund commitment by a family trust. That advisory role gives it no trust execution or payment power, and the public-markets trading mandate does not cover the commitment. A commitment may involve subscription documents, future capital calls, liquidity and tax considerations, and the trust's actual signing authority.

The manager may prepare diligence and a recommendation. In this example, the family investment committee recommends the investment under its written charter. The authorized trustees then approve or reject the commitment under the trust documents. Committee support alone cannot bind the trust unless those documents actually give the committee that power. If the trustees approve, the trust's designated signatory executes the subscription. When a capital call is due, a separately authorized payment instruction follows the bank's controls. These roles are illustrative, not presumed powers in another family's documents.

The office should record both a decision and a stop condition: no subscription until the required trust decision and signing authority are confirmed; no transfer until a properly authorized payment instruction exists. Even after the trustees approve, the public-markets manager does not gain authority to subscribe for the trust. If the family later wants to delegate private investments, it must define that scope and the required legal authority explicitly.

04Compare the Models Against Family-Office Constraints

Choose a mandate for each account. A family can delegate routine listed-security rebalancing, require pre-approval for a concentrated sale and require committee review plus the relevant entity decision for an illiquid commitment. That mix works when everyone who acts can see the boundaries.

The choice also depends on what the portfolio must fund before adding risk; our family-office investment-portfolio guide addresses that broader allocation question.

Do not assume discretion always costs more or that non-discretionary advice is always safer. Public comparisons often generalize on fee level and execution speed. Actual fees depend on the provider, account, asset class and included work; speed depends on whether the authorized people and channels are available. Ask each provider for a written proposal on the same scope and compare the family's retained work as well as the quoted charge.

A hybrid arrangement should say which assets follow which path. If a manager handles public-market assets with discretion while trustees decide private-fund commitments after committee review, specify who notices when a transaction crosses the boundary. A listed holding may become restricted, or market moves may push an allocation past a monitoring threshold. Stop any proposed order that fails its pre-trade check. Follow the mandate's documented escalation and remediation route for an existing breach; do not assume the manager may trade simply to cure it. “Hybrid” is not a control until each exception has an owner.

05Choose the Mandate and Write the Exception Route

Before changing authority, run a paper test using actual account names and roles. The office can use this compact decision record for each proposed mandate:

Here is a filled record for the two illustrative decisions. The document identifiers, timestamps, deadline and named roles below are fictional test inputs. A family's real documents must supply its actual facts and permissions.

For the same rebalance under the approval-required arrangement, the record needs an additional approval step. The following is a fictional test record, not an observed trade:

Set a response deadline and a backup approver only if the governing authority permits one. An approval must identify the proposal version and applicable limits; a changed proposal cannot simply inherit the earlier yes. No response means no trade, not implied consent. If an opportunity expires, record that outcome and revisit the mandate rather than manufacturing approval.

This exercise exposes two different failure modes. A discretionary process can fail because the limits are too broad or exceptions are invisible. A non-discretionary process can fail because the named approver is unavailable, or approvals happen in an informal message that no one can audit later. Test the backup route before it is needed, including who can say no and who can pause execution.

06Questions to Settle Before Signing

Ask the manager, adviser, custodian and family counsel questions that produce documents or a demonstrable workflow, not just verbal reassurance:

1. Which exact account and entity does each authorization cover, and who may change it?
2. What investment decisions can the manager make without a separate instruction? Which are expressly reserved?
3. How are current restrictions, tax sensitivities and concentration limits checked before action?
4. If a proposed action is outside scope, who receives it, how is approval recorded and what happens if no one responds?
5. Which person can place an order, sign a subscription and instruct a cash transfer? Are those authorities different?
6. What trade, approval, fee and exception evidence will the family receive, and how quickly?
7. How will the office suspend or revoke an authority and test that the custodian and manager have applied the change?

The right choice is the one whose decision rights match the family's actual capacity to govern and monitor them. Delegate routine action when the boundaries are specific and observable. Keep a decision when the family needs to exercise judgment that the mandate cannot safely encode. In either case, the account paperwork, entity authority and evidence trail should tell the same story before the first order is placed.

Use the filled decision record as a test with your adviser, custodian and family counsel before changing a mandate. Replace the illustrative roles with the authorized people and signed documents for each account, then confirm that the approval and execution steps work in practice.