Discretionary client agreement
Discretionary accounts with an investment mandate or a predefined model investment portfolio
If a discretionary account manager offers the client a discretionary service with an investment mandate or a predefined model investment portfolio, and receives management fees and/or performance fees by way of remuneration for managing the discretionary account on behalf of the client, the discretionary account manager has to be licensed by or registered with the SFC for conducting asset management activity and comply with the requirements set out by the SFC regarding discretionary accounts, e.g. the "Fund Manager Code of Conduct". This stipulates that a discretionary account manager should ensure that a written agreement is entered into with the client before any services are provided to or transactions made on behalf of that client.
Minimum content requirement in a discretionary client agreement:
- The full name and address of the client;
- The full name and address of the company which is providing the discretionary account management services, including the licensed or registered identity;
- Both the client and the company providing the discretionary account management services undertake to notify the other in the event of material changes;
- Authorization for discretionary management;
- Statement of the client’s investment policy and objectives, including asset classes, geographical spread, risk profile of the target portfolio, and any limitations or prohibitions on asset classes, markets or instruments (e.g. use of derivatives) and performance benchmark (if any);
- In the case where the client has selected a pre-defined model portfolio, the discretionary client agreement should specify the proportion of the asset classes, markets, and corresponding risk profile of the selected pre-defined model portfolios;
- The amount of all fees to be paid by the client, whether to the discretionary account manager or to a connected person with respect to the account, and a description of fees to be paid by the client to third parties, where applicable;
- Any consent from the client where the discretionary account manager intends to receive soft commission or retain cash rebates;
- Details of custody arrangements if the discretionary account manager provides custody arrangement by itself or through its associated entity; and
- Details of periodic reporting to be made to client.
Discretionary account management services provided as an ancillary part of brokerage services
Some brokerage firms provide discretionary account management services as an ancillary part of the brokerage services for the clients. This type of discretionary account service usually covers only exchange traded products. Therefore, no investment mandate will be set up with the client. Brokerage firms offering this kind of discretionary account service are generally required to obtain the relevant licence from the SFC, and comply with the SFC's requirements relating to discretionary accounts. Also, the brokerage firm must sign a discretionary account agreement with the client to clearly set out the investment objectives, strategy and restrictions of the discretionary account, e.g. whether it will involve IPO, GEM stocks, derivatives products, margin financing transactions, lending and borrowing of stocks, etc. The client agreement and the brokerage's records must show that the account is a discretionary one. Discretionary authority needs to be reconfirmed annually.
Fully understanding the content of the client agreement
Once an investor has signed the discretionary account agreement, the account manager can invest and trade on behalf of the client without prior notification. Therefore, investors must fully comprehend the content of the client agreement and clearly understand the investment mandate and strategy to ensure they are consistent with their investment objectives and risk appetite. Additionally, investors should also take note of whether the agreement covers other authorizations, e.g. withdrawal of funds from the client's account or transfer of funds to a third party account.
14 November 2018