Managed Accounts and Simple Discretionary Accounts

22.8 Managed Accounts and Simple Discretionary Accounts

Sometimes, life gets pretty busy, and the idea of juggling your day job along with monitoring market movements, analyzing chain quotes, and figuring out which options strategies to execute can feel like too much. That’s often where a managed account or a simple discretionary account steps in, potentially saving the day (or at least your sanity). These accounts allow you to hand over the daily decision-making, trade execution, and position monitoring to a registered advisor or portfolio manager. Of course, it’s not as simple as just saying “Go ahead and do what you like.” Canada’s regulatory framework, overseen by the Canadian Investment Regulatory Organization (CIRO), establishes stringent rules to ensure that clients’ best interests come first.

Below, we’ll explore how managed and simple discretionary accounts work, the difference between the two, and how they might fit into an overall derivatives trading framework—especially for options. We’ll also highlight the regulatory requirements and best practices you should know about if you’re considering such an arrangement. Before we dig in, let me share a quick thought: a friend of mine, who used to stress out over checking her option positions three times a day, literally breathed a sigh of relief once she signed up for a managed account. She told me, “I finally slept without dreaming of put options.” That’s exactly the kind of relief some people are looking for.

Overview of Managed Accounts

A managed account is one in which a registered portfolio manager or advisor exercises authority to make investment decisions—including options trades—on your behalf. This authority is known as “discretionary authority.” Once you sign the documentation granting your manager/account representative that authority, they can execute trades without getting your approval on each and every order. This arrangement typically suits individuals who:

• Lack the time or specialized knowledge to manage an options strategy themselves.
• Are comfortable relying on a manager’s expertise and due diligence.
• Want a professional to quickly respond to market changes (like adjusting or rolling an option position).

Now, because an advisor in a managed account practically “has the wheel,” they must operate under a fiduciary duty. That means the manager must always act in the best interests of the client, which includes choosing trades aligned with the client’s stated risk tolerance, investment objectives, and time horizon.

Regulatory Overview

In Canada, managed accounts are subject to robust oversight by provincial securities regulators and by CIRO. Historically, the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) oversaw separate channels, but those bodies amalgamated into CIRO on January 1, 2023. Now, CIRO has the power to develop and enforce regulatory requirements across both investment dealers and mutual fund dealers.

CIRO rules require that:

1. Advisors seeking discretionary authority must meet relevant proficiency and registration criteria.
2. Portfolio managers must keep detailed records of any trade decisions, portfolio holdings, client instructions, and risk profiles.
3. Conflicts of interest must be disclosed—think of scenarios where an advisor might hold the same positions in a personal account. These must be handled with transparency.

To dig deeper into these guidelines, check out CIRO’s official website at:
https://www.ciro.ca/

Additionally, the Canadian Securities Administrators (CSA) sets out broader registration rules and guidelines. The CSA also provides important registration and compliance guidance for advising representatives:
https://www.securities-administrators.ca/

Simple Discretionary Accounts

A “simple discretionary account” is a sort of “lighter” version of a managed account. In a discretionary account, you still grant your advisor the right to make certain decisions without checking in with you every time. However, this authority can be narrower in scope than that of a fully managed account.

Why might someone open a simple discretionary account? Possibly because they want day-to-day trades handled more responsively but prefer certain checks, disclosures, or limitations that keep them informed. For instance:

• The advisor might be allowed to trade within a mandated strategy—say, equity covered calls or basic protective puts—but must consult you before launching more sophisticated option combinations.
• The advisor could have pre-set guidelines. For example, they can buy and sell options only to hedge an existing stock portfolio up to a certain threshold.

Over the years, I’ve met clients who love having at least some direct input. They’re comfortable with the manager adjusting a collar strategy or rolling an expiring option. But if the manager wants to switch to a bullish call spread or start writing naked puts, they want a phone call and a conversation first—just to be sure they’re on board with the plan.

Key Differences and Similarities

Both managed accounts and simple discretionary accounts share a fundamental characteristic: the advisor or portfolio manager can trade for you with some level of autonomy. The major distinctions typically revolve around:

• Fiduciary Standard: In a fully managed account with a registered portfolio manager, a fiduciary duty is explicitly recognized in most jurisdictions. A simple discretionary account still involves a duty of care, but the scope of that duty might be less comprehensive if it’s not a designated “managed” program.

• Degree of Autonomy: A managed account usually grants broader authority. A simple discretionary account might be limited to certain products, certain strategies, or a ceiling on the size of trades.

• Reporting and Disclosure: With a managed account, you often get more comprehensive performance reporting—not just trade confirmations. CIRO’s guidelines often require monthly or quarterly performance commentary, especially if the account is set up under a conventional “portfolio management” arrangement. A discretionary account might require more frequent client contact or real-time confirmations.

• Registration Requirements: A portfolio manager or advising representative for a managed account must pass stringent requirements, often including specific levels of education, experience, and oversight. Discretionary authority can sometimes be held by an advisor with a discretionary license or an “Associate Portfolio Manager” designation, but the requirements can be slightly different.

How Managed and Simple Discretionary Accounts Work with Options

Options are a specialized domain. When a portfolio manager or advisor has discretionary power, it means they can:

• Open new trades (long calls, protective puts, covered calls, vertical spreads, etc.)
• Close existing positions (buy back calls, roll expiring puts to a new date, etc.)
• Adjust strategies when market conditions shift (e.g., converting a covered call into a collar by adding a protective put).

Given how fast the options market can move—think of news announcements, earnings releases, or unexpected changes to volatility—having the authority to move quickly can be beneficial. An advisor doesn’t have to slow down to seek your approval on each trade. However, it also means you must have strong trust that your advisor really understands how to handle derivatives in line with your level of risk acceptance.

Setting Up a Managed Account or Simple Discretionary Account

Here’s a bird’s-eye view of how the setup typically goes:

1. Initial Meeting and KYC: Your advisor must meet with you (in person or virtually) to establish your KYC (Know Your Client) information like investment objectives, financial situation, risk tolerance, time horizon, and general preferences.
2. Completing Paperwork: You’ll sign a discretionary authority agreement that details the scope of the advisor’s powers. For a fully managed account, you might sign a more comprehensive portfolio management agreement.
3. Choosing an Investment Policy Statement (IPS): Many managed accounts formalize client preferences, guidelines, and objectives in an IPS. This can specify asset allocation, allowable derivatives strategies, hedging approaches, etc.
4. Option Account Approval: Because you’ll be trading options, the firm must ensure your account is approved for the level of options trading you plan to undertake (e.g., basic covered call writing or more advanced multi-leg strategies).
5. Establishing Account Linking and Technology: The advisor sets up the account in their trading system, obtains direct access, and ensures all confirmations and statements meet CIRO’s compliance standards.
6. Ongoing Monitoring: The advisor regularly reviews positions versus the client’s risk profile, ensuring trades remain suitable.

In a simple discretionary account, steps can be similar, but the discretionary authority might be narrower. You might see a separate schedule or addendum outlines exactly which strategies or trades are permissible without prior contact.

Risks, Benefits, and Potential Pitfalls

Risks
• Misalignment of Interests: In a more negative scenario, an unqualified or misaligned manager might chase high-risk trades. That’s why full compliance with a fiduciary standard—and discussion about your objectives—is so critical.
• Overtrading Concerns: Sometimes managers might overtrade an account (churning) if maliciously motivated by higher commissions. However, advanced compliance systems, as well as oversight from CIRO, help reduce these abuses.
• Lack of Control: Once you give away discretion, you can’t step in on a daily basis to micro-manage. This is often the point, but it also means you rely on the manager’s skill and honesty.

Benefits
• Professional Oversight: Fast-moving markets often favor those who can react quickly. With a managed or discretionary account, your advisor can jump on emerging opportunities or defend your positions quickly—we’ve all seen how quickly a surprise earnings release can crush or balloon an options position.
• Time-Savings: For many individuals, letting a professional handle the day-to-day is incredibly freeing—no more toggling between streaming quotes 10 times a day.
• Access to Expertise: If your advisor is a derivatives specialist, you’re effectively tapping into a specialized skill set.

Common Pitfalls and How to Avoid Them
• Vague Agreements: Ensure your managed account agreement or discretionary authority agreement is specific about the strategies allowed.
• Not Checking Performance: Yes, the manager is in charge. Still, you should frequently review your account statements and discuss strategy changes.
• Insufficient Communication: Even a fully discretionary arrangement should involve periodic updates. Some managers host quarterly calls or send monthly portfolio commentaries.

Personal Anecdote: When Discretion Provides Peace of Mind

I recall working with a couple who loved traveling. They literally hopped from country to country about nine months of the year. They kept missing phone calls and had trouble responding to time-sensitive trades. Setting up a managed account with a robust “covered call writing plus protective puts” strategy let them roam the world with minimal stress. And sure, occasionally they’d check in from a beach somewhere in Southeast Asia, but for the most part, they were more than happy to let the professional handle it. They said: “It’s like having a personal driver for your investments. We can just enjoy the scenery.”

A Quick Look at Operational Flows

Below is a simple Mermaid diagram illustrating how decisions and communication flow in a managed or simple discretionary account structure:

    flowchart LR
	    A["Client"]
	    B["Discretionary Manager"]
	    C["Trading Desk / Platform"]
	    D["Market"]
	    A --> B
	    B --> C
	    C --> D
	    D --> C
	    C --> B
	    B --> A

• The client initially provides objectives, risk tolerance, and grants discretionary authority to the manager.
• The manager executes trades via the trading desk or platform.
• The market processes the trades, and the trading desk relays execution details back to the manager.
• Finally, the manager sends performance updates and confirmations back to the client.

Fiduciary Duty and Best Execution

Managers with discretionary authority should:

• Seek the best execution of trades. That means using appropriate trading venues, seeking tight spreads, and limiting market impact.
• Disclose conflicts that might affect their ability to act in the client’s interest.
• Document rationales for each trade, particularly if an option position is complex.

Clients can ask for these details. Many managers maintain a trade log that includes the date, time, rationale, and how it aligns with the IPS or the client’s stated goals.

Comparing Canadian Discretionary Accounts to Global Standards

Globally, discretionary services exist everywhere. In the U.S., for instance, Registered Investment Advisors (RIAs) can offer managed solutions. In the EU, MiFID II provides a regulatory framework for portfolio management and client suitability. By comparison, Canada’s system is robust and typically recognized for strong investor protection rules.

Glossary

• Managed Account
An account where a registered advisor or portfolio manager manages investments (including options) on the client’s behalf with discretionary authority.

• Discretionary Authority
The legal power granted to an advisor to make investment decisions without the client’s prior approval for each transaction.

• Fiduciary Duty
A high standard of care, requiring the professional to act in the client’s best interest, disclose any conflicts of interest, and ensure transparency.

Additional Resources

If you want to learn more about managed derivatives portfolios, take a look at this white paper by the CFA Institute, titled “[Exploring Managed Derivatives Portfolios].” You can often find it on the CFA Institute website, or check your local library’s online repository.

• CIRO Rules for Managed Account Services:
https://www.ciro.ca/

• CSA Guidance on Registration of Advising Representatives:
https://www.securities-administrators.ca/

• White Paper: “Exploring Managed Derivatives Portfolios” by the CFA Institute

• Open-Source Tools: Some advisors use open-source Python libraries (like Pandas and NumPy) or R-based frameworks to conduct pricing simulations, volatility forecasting, or scenario analyses for derivatives.

• Books:

• “Options as a Strategic Investment” by Lawrence McMillan — a classic for deep diving into advanced strategies.
• “Derivatives Demystified” by Andrew Chisholm — a user-friendly read.

Keep in mind that no resource or manager can guarantee returns. The most you can do is equip yourself with knowledge, align with an experienced professional, and ensure that your account structure matches your lifestyle, risk tolerance, and investment goals.

Sample Exam Questions: Managed Accounts and Simple Discretionary Accounts