The Financial Services Act (LSFin) has brought its share of changes. One of the areas most affected is investment advice.
A plural and complex concept
The concept of investment advice covers a wide range of services. First of all, we need to identify the two definitions provided by the LSFin.
The first is ” , which takes account of the entire portfolio”; in other words, an advisory mandate in which the manager actively monitors all positions on an ongoing basis. This is what we call Global Consulting.
The second is , which does not take into account the entire portfolio. This is what we might call Isolated Consulting. This is a mandate in which the Manager provides sporadic advice. It does not, however, track the portfolio and its evolution on an ongoing basis.
Nevertheless, these two notions cover many others that we were able to observe in the course of our work.
Some financial institutions pass on the fruits of their research to their customers. Still others inform their non-discretionary clients of every investment act carried out on their managed portfolios, with the aim of giving them the opportunity to be included in the overall order. Some clients with execution-only mandates systematically seek the informal advice of their investment manager before investing. Others are discretionary, but expect their manager to consult them before making an investment.
The mechanism by which these practices will endure and/or be integrated into the legal framework could be the subject of a dedicated article. We will confine ourselves here to analyzing the obligations arising from the advisory service within the meaning of the LSFin.
Indeed, the rules for managers can vary significantly depending on the nature of the advice they provide. It is therefore essential to clearly define the type of consultancy you are dealing with, in order to understand the resulting obligations.
LSFin and global consulting
As part of the global advisory service, the Manager analyzes his client’s portfolio in its entirety. He continuously monitors all positions, in order to provide his customers with a comprehensive advisory service.
According to the LSFin, before concluding a mandate for such a service, the asset manager must ensure that his client has sufficient knowledge and experience to understand the ins and outs of the advisory activity. The customer must be able to assess the relevance of this service, and the benefits as well as the risks it entails.
Thereafter, for each piece of advice provided, the Manager must ensure that it is appropriate to the client’s financial situation and objectives. For example, a client wishing to preserve his capital should not normally be offered alternative products.
The LSFin and insulated advice
With isolated advice, the advisor proposes interesting investment opportunities to the client, without following the client’s portfolio in its entirety. This type of advice is designed for experienced clients who invest their assets proactively.
Here too, we need to check that the customer requesting this service has the skills and knowledge to understand the nature of the advice to be provided, and how to interpret it.
Secondly, for each piece of advice provided, the Manager is required to check that the customer is sufficiently well-informed to understand the advice. We won’t offer a structured product to a customer who only knows equities, for example. Or equity funds to a client who has only mastered bond products. It should be noted, however, that according to the LSfin, a customer’s lack of knowledge and experience can be compensated for by providing explanations. But be sure to keep a record of the process in the customer’s file.
On the other hand, it is important to specify that the duty of suitability does not apply in this case. In fact, the Manager is not supposed to monitor the portfolio as a whole. It cannot therefore determine the suitability of an advice in relation to the overall risk level of the portfolio.
The reason for the advice provided
The LSFin imposes a considerable administrative burden on investment advisors, both in the case of comprehensive advice and in the case of individual advice. Article 15, 2 of the law stipulates that in the case of investment advice, Managers ” document the needs of customers and the reasons underlying each recommendation to acquire or dispose of a financial instrument “.
In other words, Managers are expected to prepare written reports for every piece of advice they provide, and for every customer. This requirement may prove prohibitive for some managers, particularly those who advise a large population of private clients.
The duty of documentation
The duties described above, if not organized in the right way, can lead to a heavy administrative burden. It’s not enough to simply fulfill these obligations. It also needs to be documented, so that the auditor or FINMA can check it at any time, particularly during prudential audits.
However, there are two ways out :
- the first is customer status. In fact, business customers are not – or only to a lesser extent – subject to this regulatory arsenal. Any client with assets of CHF 2,000,000 (or CHF 500,000 combined with sufficient experience and knowledge) can choose to become a professional client.
- The second applies to private customers, and consists of a flawless organizational structure. If the right processes and the ensuing automatisms are put in place in a pragmatic way, we believe that what looks like an administrative nightmare could end up being a bad dream.
