Agentleman was given an application form to apply for a loyalty card at a supermarket. It was a three-page booklet written in small text. He simply didn’t have the time to read all of it and was directed by the salesman to sign it as it entailed general information. He even offered to fill the form on behalf of the gentleman. Having taken the salesman’s words for granted, the gentleman signed on the dotted line.
Many of our readers would have faced similar situations. Yet, have you ever thought of the consequences of blindly signing such documents?
There is a set of documents we sign at the point of opening an account with a stockbroker firm. Similarly t here are statements we receive from the stockbroker firm/Central Depositary System (CDS). The article will focus on the importance of due diligence and the vital points to focus on when reading them.
Firstly, let’s look into the types of agreements/statements that will be discussed in the article.
TYPES OF AGREEMENTS/STATEMENTS
Bought/Sold Notes
A statement sent by the stockbroker firm when securities are brought or sold from your account. The statements are generated on the day the transaction is done and posted/emailed on the same day.
CDS Account Statements
The CDS will send account holders a CDS account statement which includes all listed securities held by the account holder and the quantity of listed securities. When the client account is maintained through a custodian bank, the statement will be forwarded to the account holder through the relevant custodian bank.
The frequency of issuing CDS account statements: A monthly statement if t he account was active during a particular month ( monthly statement).
A quarterly statement if t he account was active during the preceding three months (quarterly statement).
The CDS will also send a statement annually as at March 31 to inactive account holders (accounts with no transactions for a period of 12 months) having credit balances.
Discretionary Account
It is an account that allows an investment advisor to buy and sell securities without your consent. You must give discretionary powers to the advisor in writing.
Credit Agreement
A legal contract i n which a stockbroker firm gives a loan for a certain period for you to purchase shares. This is not mandatory. The credit agreement outlines all the rules and regulations associated with the contract.
Client Agreement
It is a legal document t hat governs the basic relationship between the stockbroker firm and the client.
Statement of Accounts
A stockbroker firm sends a statement of accounts to all clients who are debtors over trade day + 3 (T+3), on a monthly basis by the seventh day of the following month. This applies to all debtors over T+3 who have had transactions during the month and the ‘interest charged on delayed payment’ is also considered as a transaction.
IMPORTANCEOFREADING THEFINEPRINT
Enthusiastic investors educate themselves on the market prior to investing in order to maintain a profitable portfolio. Have you ever thought of the impact documentation holds towards your journey of investing?
On a broader perspective reading and understanding the documents you sign will enable you to build a constructive relationship with your advisor/stockbroker firm, minimize financial losses incurred as a result of negligence, curtail cost pertaining to dispute resolution and thereby maximize profits.
This could be further emphasized by stressing on the importance of the aforementioned agreements/ statements.
Bought/Sold Notes
Keeps you updated on the purchases and sales made from your account. This would enable you to update yourself on the current status of the account. It is even more important if you have signed a Discretionary Account.
CDS Statements
It is ideal to cross check details given in Brought/Sold Notes.
Discretionary Account
Signing this document gives your advisor the liberty to invest on your behalf without your consent. It is not mandatory to sign it. Hence, you should think twice before you sign the document. There is a possibility of incurring financial losses unless you take a wise decision.
Credit Agreement
It gives out the terms and conditions i nvolved i n taking money on credit. Once again, it is important to bear in mind that this an optional service offered to you by the firm. Before you invest on credit see if it is profitable. If you take a loan above your financial capacity, it might hinder your capacity to earn profits.
Client Agreement
It includes the terms and conditions that govern the relationship between the stockbroker firm and you. A thorough understanding on these terms prior to engaging in financial activities with the firm is vital.
Further on, it also includes the risk disclosure statement which talks of price fluctuations, aspect novices fail to understand.
Statement of Accounts
It enables investors to manage their debt and to monitor the interest charged on the debt. Failure to do so would definitely have adverse effects on the portfolio.
Power Tip
It is important to bear in mind that the stockbroker firm would make slight amendments to the structure of the aforementioned agreements. Even though we have identified the Client Agreement and the Discretionary Account as two different documents, in practice we find that the discretionary clause is included in the Client Agreement. Thus, never take the content of a document for granted. Read and understand each and every clause with caution.
CHECKLIST: UNDERSTAND AGREEMENTS/ DOCUMENTS BETTER
Most of these documents are lengthy and it is a tedious task to read all of it. At times even if you read them you might miss a few important points. Hence, the check list given below will assist you to watch out for the most important areas in agreements/ statements.
Client Agreement
Write your full name, address and NIC Number.Check if you have attached a copy to verify your identity.Check if the full name and address of the stockbroker firm is stated correctly.Look in to the licensing status of t he stockbroker firm with the Securities and Exchange Commission of Sri Lanka (SEC).Agree to notify the firm in the event of any material change to the information.Read the nature of services provided by the firm.Refer to the clause that allows investment decisions to be made on a discretionary or nondiscretionary basis. Vigilantly select the suitable option.
Read and understand the description on commission, brokerage and any other fees and charges that is to be paid by the client to the stockbroker firm.
Read the risk acknowledgement statement. This is an important factor as it refers to the risk involved when investing in the Colombo Stock Exchange (CSE).
Make sure that the firm clearly explained to you about the risk involvement and invited you to read the risk disclosure statement and ask questions.
Sign the document accepting that you have read and understood the risk involvement (only if it is explained to you verbally/ in writing).
Fees for any other services.
Discretionary Account
Ask yourself if you really want to give discretionary powers to your advisor. Don’t let your advisor trade on your account simply because you don’t have time to allocate for your investments.If you wish to allow your advisor to trade on your behalf inform in writing to the stockbroker firm.When giving written authorization you should clearly state your investment objectives.Check if the chief executive officer of the stockbroker firm has given you approval to operate a Discretionary Account.If you need to terminate the agreement make sure you give it in writing. The same applies if the stockbroker firm’s wishes to terminate the contract.
Brought/Sold Notes
Verify the following Price of the stock, CDS/CSE fee, date, SEC Cess, CDS account number, net amount, security name, government tax, quantity, net amount, price, settlement day, brokerage.See if the transactions made were directed by you. n Analyse realized/unrealized profits along with the brokerage charged.Usually the Brought/Sold Notes are posted. If you require an electronic copy inform the firm in writing.Usually these statements cannot be amended. If you receive such a document verify if the CEO or the compliance officer of the firm has approved it.
CDS Statements
CDS Statements are emailed or posted. Hence, make sure that you give accurate details and also update the information if required.
Cross check with the Brought/ Sold Notes and check if the details tally.If you don’t receive statements contact the CDS in writing at your earliest. If you have requested for it via email, provide them with an alternative email/postal address.
Credit Agreement
Ask yourself if investing on credit is suitable for your financial needs.Clearly state your personal details (name, NIC number, etc.)
Look into the contract period and see if it suits your investment goals.Check the interest charged. n If you wish to terminate the agreement make sure you inform them in writing.If you intend to activate it, once again make sure you inform them in writing.Infer into the grounds the broker can use its discretion to demand the client to settle the outstanding credit.
Statement of Accounts
Monitor the interest charged.
Monitor the repayment days.
Power Tip
Never sign blank agreements and allow salesmen to fill in the blanks on your behalf. n Don’t place your signature on blank papers. n Pay special attention to text in small writing.
Most agreements would entail a clause that refers to ‘other terms conditions that govern’. These are not included in the agreement. Request the firm to brief you on such terms and conditions.
Read the completed agreement at least twice before you sign.Give clear and precise instructions at all times and its best if you could give it in writing.If you blindly sign agreements, you might not be aware of the content and will not be able to claim for remedies as you have signed it.
CLIENT – STOCK BROKER DISPUTE RESOLUTION
As we all know, prevention is better than cure. However, failure to be diligent about your investment and related documentation could result in disputes between the client and the advisor/stockbroker firm. Most of the reported cases could have been avoided if investors were more responsible from their end. Nevertheless, the flow chart given (Figure 1) will spell out the procedure that should be followed in such situations.Power TipIf you come across any discrepancies in the transactions bring it to the notice of the relevant officer at your earliest.
If there are undue delays from your end, you might not be able claim remedies. Thus, it is of utmost importance for you to comprehend the Brought/Sold Notes and CDS Statements you receive without delay. Let not reduction of profits be the price of your negligence. As an eminent individual once said, “It is the neglect of timely repair that makes rebuilding necessary.” Be a vigilant investor and maximize your returns in the market.
