Trading Costs and how they differ between Discretionary and Non Discretionary Investment Accounts

Commission per share will be normally much lower for a discretionary account where your adviser combines purchases and sales into block trades.

The bid and ask spread price also affects trading costs and this is largely affected by the liquidity of the security being transacted.

Hidden trading costs or execution costs are far larger than the combination of commissions and bid and ask spreads for most transactions.

For example an adviser that wants to complete a block purchase for all their discretionary accounts has to be cognizant of the amount of stock being offered, not simply the price. Assume a buy order is placed for 100,000 shares of a security with only 25,000 shares being offered. Even for a relatively liquid security, this order imbalance of 75,000 shares will drive the share price higher than the combination of the commission per share and the bid ask spread.

On the other hand, an adviser dealing with a non discretionary account may recommend the purchase of a small quantity of 200 shares for the same security. This purchase order is obviously much smaller than the previous block order and would not affect the share price materially over the bid and ask spread.

Lastly a client that has a discretionary account with their adviser must be very careful of the tax consequences for a non registered account.

Conclusion

While there are lower commission costs for discretionary accounts, the hidden execution costs are normally much greater than the commissions. In addition the increased probability of capital gains being realized will trigger more negative tax consequences.

Regardless of your adviser’s recommendations, my advice is to stick to a non discretionary type of account where you, the client, have the final say for all buy and sell transactions.

 

Please see our disclaimer at mcmurtryinvestmentreport.ca. Copyright 2019 McMurtry Investment Report. All rights reserved. 

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