How should investors protect themselves when using discretionary account services?
Discretionary account holders can enjoy the benefits of tailored professional investment management services. But as the account holder, you are responsible for the consequences of the transactions conducted by the authorized discretionary account manager for your account, irrespective of profit or loss. Additionally, breach cases involving discretionary accounts have happened before. For example, some brokers effected transactions without a written authorization from the client, and effected transactions outside the mandate agreed with the client. Therefore, investors must carefully protect their own interests.
1. Open a discretionary account properly
To authorize brokerage firms, investment management companies or banks to manage your investment account and conduct trading on your behalf, you must open a discretionary account. You should not simply give a third party authorization to the staff, even though he/she may be your friend or relative.
2. Sign the client agreement for the discretionary account
You must sign the client agreement for the discretionary account. If the account holder has not given written authorization and only a verbal agreement is reached, disputes may arise in which it is one person's word against another's. To prevent this kind of situation from happening, the discretionary arrangement should be concluded with the signing of the client agreement.
3. Fully understand the investment mandate and strategy
Investors must fully understand the mandate and strategy of their discretionary accounts, e.g. whether they involve derivatives, margin financing transactions, lending and borrowing of stocks, etc. This is to ensure that the investment mandate, strategy and the liquidity of the investment portfolio are consistent with your investment objectives and risk appetite.
4. Monitor your account closely
Check the trade confirmations. Verify the cash balance and details of the transactions listed in the account statement. Check each transaction carefully to ensure it matches your investment mandate.
5. Periodically review account performance
Communicate with your discretionary account manager on a regular basis and review the investment performance of the account to ensure it is consistent with your investment objectives. Take notes during any meeting or phone call with the discretionary account manager. In this way, you will have records to refer back to if anything raises a red flag in the future.
6. Do your own research
Although discretionary accounts offer professional investment management services, investors should not fully rely on their discretionary account managers. Rather, investors should conduct independent research to monitor their account activities and also the performance of their discretionary account managers.
7. Enquiries and complaints
If you notice errors or irregularities in your account, e.g. if you see transactions outside of the investment mandate, you should contact the discretionary account manager (e.g. Compliance Department) immediately.
14 November 2018