Potential conflicts of interest and commission disclosures of discretionary account managers

Financial intermediaries
Stocks
Fund
Commissions

 

The way in which discretionary account service fees are charged could lead to potential conflicts of interest, e.g. some unscrupulous discretionary account managers could churn the managed accounts to generate more income if they charge commissions for trading.

In addition, other than the fees paid by the clients, some discretionary account managers could receive remunerations from the product issuers. Quoting funds as an example, such remunerations include rebates of subscription or switching fees and trailer fees (A trailer fee is an ongoing commission paid by a fund company to the discretionary account manager as long as the client remains invested in the fund). This could motivate discretionary account managers to purchase products which bring higher rewards/benefits or conduct frequent trading in the managed accounts to generate more commission income.

To enhance transparency and help investors select suitable discretionary account managers, starting from 25 November 2018, where a discretionary account manager explicitly receives monetary benefits from a product issuer for effecting a transaction in an investment product for a client, and/or makes a trading profit for effecting a transaction of an investment product from a third party for a client, the discretionary account manager should disclose the maximum percentage of the monetary benefits receivable by the type of investment product. For example:

 

Type of investment products Monetary benefits or trading profits receivable by discretionary account manager
Bonds Up to 3% of the investment amount of the transaction*
Funds Subscription fee rebate: Up to 2% of the subscription amount* Trailer fee: Up to 60% of a fund’s annual management fee*

 *Examples for illustration only

 

Furthermore, if there are other non-monetary benefits or incentives under non-explicit remuneration arrangements (e.g. a discretionary account manager purchases products from its affiliated company on behalf of the client), then the discretionary account manager should make a generic disclosure.

The disclosure must be made in writing. The discretionary account manager should disclose the above to the client at the account opening stage or prior to entering into a discretionary client agreement with the client. Investors should take note of the information regarding the disclosure of interests of the discretionary account manager, clearly understand the arrangements on fees, monetary and non-monetary benefits. Ask your discretionary account manager if you have any questions.

 

 

14 November 2018