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The Basics: Consultations with Advisers

Obligations of advisers to protect and explain

Financial services providers are subject to strict obligations relating to the protection of and explanation towards their customers. The Securities Supervision Act (WAG 2007 – Wertpapieraufsichtsgesetz 2007) defines obligations about their behaviour (“rules of conduct”) in providing their services that must be adhered to for many capital market products.

When providing commercial services that are connected to securities or other forms of investment of assets of customers, the customer’s best interests must be given foremost consideration. Such services are to be conducted by financial services providers with the necessary expert knowledge, diligence and scrupulousness in the interest of the customer (such as for example ensuring that an order is executed at the best possible price).

A financial services provider is required to ensure that conflicts of interest are avoided, and to ensure, in the event of unavoidable conflicts of interest, that the customer’s order is executed while ensuring the best interests of the customer. In the event that customer interests being negatively impacted is unavoidable, the financial services provider shall disclose the nature and cause of the conflict of interest, prior to conducting transactions for the customer.

Furthermore, the providers of financial services are required to obtain information from customers about their experience and knowledge about the transactions, that are intended to be the object of the financial services to be provided, about the aims they strive for by conducting the transactions and also about their financial situation, to the extent necessary to ensure that the customer’s best interests are maintained and also with regard to the nature and scope of the intended transactions. This legal rule is intended for your protections, and your adviser is only in a position to advise you, as a result of it.

Any financial services provider that does not ask such questions acts in an unprofessional manner, and also breaks the law. Accordingly the financial services provider is required to draw up a customer profile, which must be also be made available to the customer upon request.

Furthermore, all necessary information (e.g. the characteristics and risks of the transaction, costs, terms, price limits and trading venue) must be communicated to the customer about the planned investment, to the extent that is necessary to protect the interests of the customer and in accordance with the nature and scope of the intended transactions. This provision subjects the financial services provider to a comprehensive disclosure obligation and obligation to explain the risks entailed.

The details about the investment can often only be found in the terms and conditions. It is therefore strongly recommended to ask in detail about the conditions of investment.

Applicable principles for consultations with advisers

The advice must be tailored to the customer’s personal circumstances – the following principle applies: “The right form of investment for the right customer”. In the event that an investment wish deviates substantially from the investment aims and risk appetite of the customer, then this is required to be explained to the customer.
Advice must point out both the general risks associated with investment (such as market performance, interest rate trends, value performance) as well as the specific risks related to the investment form in question (solvency, term, price risk, interest rate risk and exchange rate risk). The customer must be place in a situation, to be able to become aware of and judge the investment form in terms of its features, opportunities and threats, as well as any possible tax-related effects. In particular, in the case of structured investment forms, it is important that how their work and also the associated risks (investment-specific / product-specific advice) are clarified on an individual basis.
There is an obligation during a consultation with an adviser to provide the customer with complete and correct information. The information provided must be true and easy for individual customers to understand. Providing incorrect information as well as the omission of important information (e.g. known negative facts) that are necessary for the customer’s decision whether or not to invest may provide decisive in relation to liability. The customer must be placed in such a situation that they are able to understand the effects arising from their investment decision.
In relation to investment advice, obligations relating to advice on the part of the investment services provider ends upon the customer’s order being executed. Special services exist for ongoing advice (e.g. an asset management contract). The investment service provider as a rule informs customers about changes that have occurred that influence the value of the forms of investment at the request of the customer and provided that such information is available.

Misleading advice

If the credit institution or investment firm does not adhere to the principles above in relation to consultations, then it is possible that an issue of misleading advice has occurred.

In the case of the adviser making personal recommendation to the customer, a particularly high level of diligence must apply – in particular in relation to the correctness and completeness of information that has been passed on. The aim of the consultations with advisers is to ensure that the customer only invests in such forms of investments that:

  • the customer has been adequately informed about how they work and the risks entailed,
  • are consistent with the customer’s investment aims,
  • appear reasonable in terms of the customer’s personal and financial circumstances.

Source: Leitfaden zur Anwendung der Wohlverhaltensregeln nach dem Wertpapieraufsichtsgesetz 2007, Wirtschaftskammer Österreich (Bank – Versicherung)

 

  • How high is the risk of a loss with this investment? Products are often described as being “risk-free” and in the event that losses do occur, then the standard explanations is that “something unforeseen” has happened.
  • What is the credit quality (creditworthiness) of the issuer like? Is the security or the issuer subject to a rating issued by an official rating agency? This should be understood as a standardised credit assessment, which is closely related to creditworthiness, but extends further, since it addresses the company as a whole.
  • Is the security traded on a stock exchange?
  • On what exchange is it listed, and in which market segment? The listing of a security on a regulated and monitored stock exchange is a sign that the paper may be traded in subject to certain criteria relating to its secure and orderly nature. Exercise the utmost caution, if you are offers shares that are not traded on a recognised exchange (also known as a “regulated market”. In such cases, assurances are frequently given that a stock exchange flotation of the company in question is imminent and that there are only a few formalities remaining to be cleared up. In many instances, however, the company has no intention of listing on the stock market, or the company would not fulfil the criteria for admittance to the stock market. When purchasing such shares, you must be aware, that you will either not find a purchaser to buy the shares of you, or that you will only be able to do so at a considerable loss.
  • If required, how quickly is it possible to find out about the value of shares? Is the liquidity of the asset in any way adequate, to allow the asset to actually be sold at the indicated price?
  • In the event that I choose to sell an investment prior to maturity are additional charges incurred, or can a reduction in profit be expected?
  • Is it possible to terminate/redeem an investment early?
  • Do obligations exist to make additional payments in relation to the investment?

Ask whether you will receive a prospectus, and whether it is a mandatory prospectus in accordance with the Capital Market Act or the Stock Exchange Act, that has been checked or approved by a checker of prospectuses or the FMA. The issuer, prospectus auditor, the auditor or your financial services provider are only liable in the event that there is a mandatory prospectus. The financial services provider is obliged to give you any other kind of prospectus that exists upon request.

In the event that the investment is a capital investment fund then the necessary information documents (e.g. Prospectus, key information documents, important investor information) should be made available, to allow an investment decision to be made. A separate information document exists for alternative investment funds (AIFs) pursuant to Article 21 of the Alternative Investment Fund Managers Act (AIFMG – Alternative Investmentfonds-Manager-Gesetz).

Frequently buying and selling securities does not necessarily emerge to be an advantage for your investments, since it may lead to losses in capital, as a result of unnecessary excessive charging of fees and commission (also known as “churning”). Check your securities account regularly, and if you are uncertain about anything, contact your adviser.

Advertising

In principle information and advertising material must be fairly written, with contents being imparted fairly, and such material must not be misleading. All marketing information and advertising materials must be presented in such a way that it is possible to recognise them 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.

Market standard fees

The Financial Market Authority is required to disclose the range of market standard fees for investment firms on its website.

The disclosure of the range of market standard fees for investment firms – including with regard to detecting potential conflicts of interest – is intended to act as a guide for customers wanting to make use of investment services. In this regard, investment firms are subject to an additional information requirement towards their customers, namely advising their customers about the range of standard fees that are disclosed by the Financial Market Authority.

Further information can be found here (available in German only).

Protection of customer assets

In the event that a company holds financial instruments or money that belong to you, the company is required to take suitable precautions, to protect your rights as owner:

  • Financial instruments and money of the company or of other customers are to be kept separately from your financial instruments and money;
  • Detailed records and accounts must be kept, and the accounts must be reconciled on a regular basis;
  • The company is required to send you a report at least once a year containing precise details about the financial instruments and moneys it holds for you.

In Austria the requirement named with regard to the distinctness of funds for a credit institution is covered by Article 11 (custody ledger) of the Securities Deposit Act (DepotG – Depotgesetz).

Source: Guidelines for Customers on the Markets in Financial Instruments Directive (MiFID); Investing capital in financial instruments.

Best execution of customer orders

If you appoint a company to purchase or sell a financial instrument, your order should be executed directly after comparable customer orders (in the order in which the company received the order) and without delay.

If for any reason the company has any significant difficulty is processing your order in the correct sequence, they must inform you of this being the case.

Best execution means that the company is required to execute your orders in such a way, that the best possible outcome is ensured for you. This is known as best execution.

The company should in principle identify the trading places, that permit the best execution. Examples of trading places are stock exchanges, trading platforms, other companies, or as applicable the company itself that you have given the order to.

To obtain the best execution of your orders, the company must take a range of factors into account, such as the price, execution costs, as well as the probability of execution.

The most important aspects are those of the price and the total costs (therefore the total costs to be paid by you for a transaction, including the price, all expenses, fees for the chosen trading place, clearing and settlement fees and other fees that might be payable to third parties involved in the execution of the order).

Reporting obligations towards customers

Your financial services provider must provide you with reports in a suitable form about the investment services provided. The specific reporting requirements depend on the type of service concerned, but however must always contain any associated costs.

Source: Guidelines for Customers on the Markets in Financial Instruments Directive (MiFID); Investing capital in financial instruments.

Transfers

  • Never pay the money to be invested into the account of the investment services provider or the investment firm. This rules out the risk of the investment services provider or investment firm not transferring your money onto the investment company and to profit at your expense. The investment services provider or the investment firm is prohibited from providing services that include the holding of money, securities or other instruments belonging to customers, thereby ensuring that the company in this regard may at no time be indebted to its customers (this ban also relates to the establishing of a collective custody account)
  • Ensure that the account into which you are paying is held at a trustworthy bank!
  • Only you should be authorised to dispose of funds held in this account!
  • Remember that many investors have already lost their money, for example by many international transfers (to collective custody accounts).

Frequently accounts and securities custody accounts are opened at banks and brokers with familiar sounding names, but whose name is easily confused with companies with an excellent reputation. In this case, you should also check with your regular bank. The broker may be authorised to make arrangements using your assets on behalf of your financial services provider that you do not know anything about.