Advisory meetings – these principles must be observed!

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As the client of a financial services provider you are required to be particularly well protected and to have products comprehensively explained to you. This is defined in the Securities Supervision Act (WAG 2018; Wertpapieraufsichtsgesetz 2018). The Securities Supervision Act defines obligations about their behaviour (“rules of conduct”) in providing their services that must be observed for many capital market products.

  • Your interests as a customer must be protected to the best possible extent
  • Conflicts of interest should be avoided. In the event that it is unavoidable for customer interests to be negatively impacted, the financial services provider must disclose the nature and cause of the conflict of interest to you, before it conducts transactions for you.
  • Financial services providers require information from you – only then are they able to advise you. The obligation therefore exists of creating a customer profile, which must be given to you upon request. Warning, financial services providers, which do not collect the following information, and unprofessional and are breaking the law.:
    • Information about the experience and knowledge of the customer with transactions that are the subject of financial services.
    • Information about the customer’s objectives to be achieved using these transactions
    • Details about the financial situation of the customer
  • You have a right to receive in-depth information and to have risks explained to you (for example: characteristics and risks associated with the specific transaction, costs, terms, price limits as well as the location of the stock exchange)
  • Marketing and informational material must be fair: Information must be imparted in a clear manner, and must not be misleading. All marketing information and advertising materials must be presented in such a way that they can be recognised as being advertising. The overly frequent presence of financial services providers in the media does not form a benchmark for their integrity. Financial product adverts, which are used explicitly to solicit customer deposits, are principally associated with risks.

The following types of investment advice exist:

 

Table: Investment advice
Investment advice on an independent basisInvestment advice on a non-independent basisAdvice-free transactionExecution-only transaction
OfferObliged to offer a broad range of products and issuersAllowed to be restricted to individual products and issuersNo restrictions on products/issuersNo restrictions on products/issuers
FinancingFor costs, does not receive commissionsReceiving commission from bank/issuer permissibleNo costs for adviceNo costs for advice
Appropriateness Test, Suitability TestYesYesYesNo
Recommendation by the adviserYesYesNoNo

 

Where a financial adviser offers you a sufficiently large range of financial products, they are said to be providing investment advice on an independent basis. Such advice must be wide-ranging in terms of the products available on the market. Furthermore, the choice shall not be allowed to be restricted to a single provider of products, or from providers with close links to the financial adviser.

Fees and commission payments that your financial adviser receives from the provider, are to be passed on to you. This does not apply to minor non-monetary benefits – such incentives must however be disclosed to you.

Investment advice on a non-independent basis means that the range of products on offer predominantly contains financial instruments which are issued or offered by product providers, who are closely linked to your financial adviser.

Equally, while also bearing your interests in mind, it is permitted for them to retain benefits that are paid to them, which improve the quality of the respective service. The existence of, nature and amount of contributions that increase quality are required to be disclosed to you.

In the case of “advice-free” business a check is conducted to see whether you understand the financial instrument and the risks entailed on the basis of your personal knowledge and experience. In the case that you do not pass the check, then you are to be warned. Such a warning may also occur in a standardised format.

In “advice-free” business there is no checking whether the product matches your financial or personal situation or whether it corresponds to your investment aims,

Unlike advisory business, your investment decision is not based on a personal investment recommendation by the service provider.

The following are considered as “advice-free” services:

  • ones for which the credit institution gives general information (product-specific and investment-specific information) and/or
  • ones for which the client has already precisely specified their investment preference, and
  • where no personal recommendation is made by the bank.

Advice-free services may be provided for example during:

  • Placement of orders by means of telecommunication;
  • Online banking;
  • Discount brokerage, or
  • Placement of orders in the branch.

Out-and-out execution only business covers the conducting of orders in terms of their explicit execution. Only transactions in relation to non-complex financial instruments can be conducted..

It is not necessary to collect customer-related information in so doing. Furthermore, your investment decision will not be checked by the financial adviser. You must however be informed about the lower level of protection of out-and-out execution only business – in at least a standardised form.

Advisory meetings – a guide

If you have opted for investment advice, then the following applies:

  • The adviser must disclose for which entity he/she is working, and where the entity is licensed and supervised.
  • Advice must be tailored for your personal situation: The following principle applies: “The right form of investment for the right customer”. Where your desired investments diverges substantially from your investment aims and your risk appetite, this must be explained to you and you must give written consent!
  • The advice must advise you about all the risks associated with this form of investment, for example general risks like interest rate trends or specific risks like the term.
  • From the advisory meeting you must be in a position to obtain a complete overview of the impact of the investment decision.
  • The adviser is required to inform you during the advisory meeting in a complete, comprehensible and correct manner.
  • A suitability statement (= in accordance with the preferences and requirements of the client) must be drawn up for every recommendation. The contract for the recommended transaction shall only allowed to be concluded, if you have been given the suitability statement.
  • A statement of costs is required to be drawn up for every recommendation, which contains all costs and information about the applicable payment modalities. This must be given to you.

Consider which questions you would like to clarify during the advisory meeting, for example:

  • How high is the risk of a loss of this investment?
  • What is the credit quality (creditworthiness) of the issuer?
  • Is the security traded on a stock exchange?
  • If required, how quickly is it possible to access the investment assets?
  • In the event of choosing to sell an investment prior to maturity are additional charges incurred, or is a reduction in profit to be expected?
  • Is the early redemption of an investment possible?
  • Might obligations arise to make additional payments in relation to the investment?
  • In the case of a prospectus: If it is a compulsory prospectus under the Capital Market Act (KMG; Kapitalmarktgesetz) or the Stock Exchange Act (Börsegesetz), which was checked or approved by a prospectus checker or the FMA?
  • In the case of investment funds: Did you receive all information documents (for example, the prospectus, Key Information Documents, Key Investor Information Documents)? There is a separate information document for alternative investment funds (AIFs).

Generally the advisory duties of the credit institution or investment firm end with the execution of your order. However, follow-up advice may also be arranged. This is where the entity performs a regular assessment of suitability for recommended financial instruments, and regularly makes a report available for you. You must explicitly give your consent to such follow-up advice.

 

Further information: