Investment services - What are they and what protection measures are there for investors

• The individual investment services
  • 1. Execution of orders on behalf of clients
  • 2. Trading on own account
  • 3. Management of multi-lateral trading facilities
  • 4. Reception and transmission of orders
  • 5. Subscription and/or placement with or without firm commitment underwriting or stand-by commitments to issuers
  • 6. Portfolio management
  • 7. Investment advice
  • 8. Accessory services

 1. Execution of orders on behalf of clients

If we want to purchase or sell a security (share, Government security, etc.) we can contact an intermediary who carries out the order execution service on behalf of clients.

Having received the order for the purchase or sale of a security, the intermediary executes it (it trades the security as they say) choosing from among several trading venues:

• organized markets;
• multi-lateral trading facilities;
• internalization of the order.

Organized markets are places for the exchange of securities, admitted beforehand for trading on said markets, where the purchase and sale proposals of several operators come together in an organized manner and on the basis of pre-determined rules giving rise to the finalization of contracts. The organized markets are authorized by Consob and run by a specific management company (for example Borsa Italian spa, the main Italian management company) on the basis of regulations.

The multi-lateral trading facilities are also places where numerous purchase and sale proposals come together for the finalization of contracts. They can be run by the management company of the organized markets or by asset management and investment firms (SIMs) and banks. In more detail, the running of these facilities represents a separate investment service.

The internalizer of the order, as can be seen in the subsequent section, is a bank or an asset management and investment firm which, upon the request of the client, sells said client its financial instruments or directly acquires them from said client, therefore operating as "direct counterpart".

The objective of the intermediary which executes the orders must be to pursue the client’s interests in the best way, paying attention to the following factors:

• price of the security which is purchased or sold;
• order execution costs;
• speed and probability of execution;
• dimension a nd nature of the order.

If the order originates from a common investor (and not from a bank, insurance company or similar), the intermediary must favour the price of the security and the trading costs, finding the solution which ensures the client the most advantageous overall payment (price + costs).

In order to obtain the best result, the intermediary – as mentioned – has several trading venues at its disposal.

The choice must be made on the basis of precise and pre-determined criteria which represent its order execution strategy.

The execution strategy determines the trading venues for each category of financial instruments which, according to the intermediary, make it possible to obtain the best possible result on a long-term (and, therefore, not occasional) basis. The strategy then contains the criteria which, as and when, in relation to the individual order, will steer the choice of the specific venue.

The intermediary must inform the client, in hard copy or via the website, of the main traits of its strategy. Subsequent amendments, if significant, must also be communicated.

Why is it necessary to be aware of the strategy?

In the first instance, if we are careful investors, we may be able to gain an opinion on the quality of the service which will be provided to us by the intermediary. The greater the number of execution venues contemplated by the intermediaries, the greater the commitment will be aimed at obtaining the best possible result for the client.

Furthermore, this permits us to check whether the intermediary has observed the strategy for the purpose of obtaining the best possible result: upon our request, in fact, the intermediary must demonstrate to us that it has executed the order in observance of the strategy.

The client can also give specific instructions, maybe indicating that the order be executed on an organized market rather than on a multi-lateral trading facility.

In this case the intermediary, exclusively for the aspects associated with the instructions received, is released from observing the strategy: it is as if the client takes on responsibility, by means of their choice, for personally pursuing the best possible result, giving up entrusting this task to the intermediary.

The client may confer the order using the formalities indicated in the contract. Thus, there may be written, verbal or telephone orders or those via internet.

Before executing a purchase order, the intermediary must inform the client of the features of the financial instrument type which it is asking the client to purchase and of the related risks.

The intermediary must also assess whether the transaction is appropriate for the client (see Part I for the assessment of appropriateness). Accordingly, it must inform itself of the degree of experience and knowledge of the client in relation to the type of financial instrument requested or proposed and, in particular, must take into account:

• the client’s familiarity with the type of transaction requested or proposed;
• the volume, the frequency, and the nature of the transactions achieved in the past;
• the client’s level of education;
• the client’s profession.

We should mistrust the intermediary who does not ask us for this information or minimizes the importance thereof or, even, invites us not to provide it: they are not doing their job properly because without this information they cannot assess our ability to comprehend the risks of the investment and, therefore, assess whether it is appropriate for us.

If we do not provide the information, the intermediary will not be able to tell us (and will warn us of this circumstance) whether the investment is appropriate or otherwise. Why lose this form of protection so as not to provide certain information?

If, by contrast, we provide the information, the intermediary will have to warn us in the event it considers the transaction to be inappropriate. If we receive this warning, think about it: it might not be the right investment.

There is another case where the intermediary does not assess the appropriateness of the transaction: when the customer requests it to operate as simple order executor (see Part I).

Having received the order, the intermediary must take action to execute it under the best conditions. In this phase, it must warn the client if it comes across any difficulty in the execution and, in turn, the client must request information on the status of the order.

After having executed the order, the intermediary must send the client a communication, in hard copy, where it confirms the execution and indicates:

• the day and hour of execution;
• the type of order;
• the venue of execution;
• the financial instrument being traded;
• the quantity of financial instruments traded, their unit price and the amount paid in total;
• the sum total of the fees and charges paid and, if the client requests, the breakdown of the sum by individual items;
• any fulfilments the client is responsible for so as to be able to "regulate" the transaction (for example, the consignment of the securities sold or the monetary equivalent value for those purchased);
• the circumstance that the client has had the same intermediary, a company belonging to the same group or another client of the intermediary, as counterpart.

This is all useful information for checking the activities of the intermediary. Read it and keep it: if a dispute should arise, it will be useful to have it.

2. Trading on own account

As already mentioned, trading on own account is the activity by means of which the intermediary, upon the instructions of the client, sells the latter its own financial instruments or purchases them directly from said client (as a rule, one says that the intermediary operates as "direct counterpart").

When trading on its own account, the intermediary:

- commits "own positions" and in other words satisfies the investment or divestment requirements of the clients by means of financial instruments already present in its own portfolio;

- enters into the purchase/sale contract as the direct counterpart of the clients;

- executes the orders of the clients.

This understood, trading on own account activities represents a method of performing another investment service: the execution of orders on behalf of clients described in the previous section.

It follows that the intermediary who trades on own account must not only be authorized for this service but, also, for the execution of orders in behalf of clients service

In actual fact, in order to purchase or sell securities, we must contact an intermediary authorized to execute orders on behalf of clients. If this intermediary is also authorized to trade on own account, it may internalize the order on condition that this solution is able to obtain the best possible result for the client.

When executing the client’s order, the own account transactor will have to observe all the rules laid down for the order execution service described in the previous section.

3. Management of multi-lateral trading facilities

The management of multi-lateral trading facilities is an investment service which makes it possible to match purchase and sale proposals originating from numerous operators, on the basis of pre-established rules.

The multi-lateral trading facilities are similar to organized markets, with the difference that they can be managed not only by organized market management companies but also by asset management and investment firms and banks authorized to provide this service.

The authorized parties must observe specific requisites and rules in order to guarantee a fair, orderly and transparent trading process vis-à-vis the users and inform Consob of a series of information relating to the parties and the instruments admitted for trading, the operating rules of the systems and the supervisory regulations adopted in order to ensure the orderly performance of the trading.

It is nevertheless a service which is not normally provided "directly" in favour of the investor (in that it is requested by or proposed to the latter).

From the point of view of the investors, the multi-lateral trading facility is nothing more than one of the trading venues which the intermediary/executor of orders uses for the purpose of achieving the best possible result for the clients.

4. Reception and transmission of orders

If we wish to purchase or sell a security, besides an intermediary authorized to execute orders, we can also contact an intermediary who offers the order reception and transmission service.

By means of this service, the intermediary who has received a purchase or sale order does not execute it directly (as the executor of orders would), but forwards it to another intermediary for its execution.

But why must we address a transmitter of orders rather than an executor?

Via the order transmission service, we delegate our intermediary with the choice of another intermediary who will have to execute the order. It will therefore be the transmitter of the order who will have to identify the transactor capable of obtaining the best possible result which, if we are common investors, ensues from the solution which ensures the best overall payment.

In order to identify the most suitable transactor, the transmitter of the orders will exploit its experience and professionalism in order to assess the order execution strategies (see Part II) of the various intermediaries present on the market.

In turn, so as to choose the order transmitter, we can assess its transmission strategy, by means of which the intermediary identified the transacting parties to whom the orders will be transmitted for each category of financial instruments.

Apart from these differences, there are many similarities with the order execution service with regard to the order conferral methods, the obligations of the intermediary to correctly inform the client, to assess the appropriateness of the transactions and provide the report on the service provided (for these aspects, see Part I).

5. Subscription and/or placement with or without firm commitment underwriting or stand-by commitments to issuers

The companies which issue financial instruments generally offer them to investors via public offers (also called investment offerings).

The offer takes place via intermediaries who contact the investors by means of distribution networks (bank branches, financial advisors, etc.).

In essence, the subscription and/or placement service involves the distribution of financial instruments, as part of a standardized offer, on the basis of an agreement with the issuer (or offerer).

Various forms of this service exist.

An initial differentiation concerns the subscription or placement transactions. Subscription takes place when the securities offered are newly issued and are introduced for the first time onto the market. Placement takes place when the securities have already been issued and are subsequently resold.

The placement, or the subscription, can be achieved in public form, and therefore targeted at all the investors without distinction, or in private form, in other words targeted at an selected circle of investors, normally professional (banks, insurance companies, etc.).

The placement, or the subscription, can take place "with" or "without" firm commitment underwriting or stand-by commitments to issuers.

In the case of placement "without", the intermediary undertakes just the obligation to seek the parties from among the general public interested in subscribing or purchasing the financial instruments to be placed; the risk of failure in the placement encumbers the issuer alone.

By contrast, in the event that the intermediary himself subscribes or purchases the securities beforehand, or in any event provides a guarantee for the success of the transactions, it personally undertakes the risk of the successful outcome of the transaction. If some securities should remain unsold, the intermediary/placer remains the owner thereof, if it had purchased them beforehand, or would be obliged to purchase them itself if it had undertaken a guarantee in this sense.

It is evident that if the intermediary undertakes the risk of the transaction, it has a further interest in placing all the securities offered.

When providing the service, the intermediary must operate in the interests of the client and fulfil all the obligations laid down for the provision of the investment services.

It will therefore have to provide the necessary information to the clients, assess the appropriateness of the transaction, correctly handle any conflicts of interest and operate on the basis of a written agreement (see PART I in relation to these aspects).

It may occur that the issuer (also know as product company) gives up sums of money to the placer in the form of incentives. The receipt of these incentives must be aimed at increasing the quality of the service provided to the client (for example, consenting direct access to a greater variety of products) and must not prevent the fulfilment by the intermediary of the obligation to serve the client’s interests as fully as possible.

6. Portfolio management

If we do not have the expertise or the time to dedicate to our savings, we can appoint an intermediary to invest all or part of our assets in financial instruments by means of the portfolio management service.

The intermediary will decide on our behalf which financial instruments will make up our portfolio so as to turn it to account and will also see to all the transactions necessary for purchasing or selling them. If we wish, we ourselves can order the purchase or sale of specific securities.

Before providing the service, the intermediary must assess whether the service offered (or requested) is adequate for the client and in other words whether, on the basis of the information acquired by said client, it corresponds to their investment objectives without exposing him to risks which he cannot bear or comprehend (in order to learn more on the adequacy judgement, see Part I).

The judgement of adequacy will, first and foremost, concern the service itself: not all the management schemes (or "lines") are the same, differing on the basis of the features and the degree of risk.

When performing the service, the intermediary will then have to always assess that each individual investment transaction is adequate for the client, thus gauging the management scheme to the specific characteristics and needs of the client.

In order to seriously assess the adequacy, the intermediary must ask the client for certain information: it is not possible to establish whether an operation is adequate if you are not aware of the client’s experience of investments, their financial situation and the investment objectives.

If the client refuses to provide the information, the intermediary will have to refrain from providing the service.

As for all the investment services, the intermediary will also have to provide a series of information on the activities it provides. In addition to the information common to all the services, we must also be aware of:

- the features of the management of our portfolio – The intermediary will have to indicate to us the objectives (increase in the capital over the long-term, maintenance of the capital, etc.) and the risk levels of the management, the types of financial instruments (and the related proportions) which can make up the portfolio (for example, there can be bond, share, balanced management lines or those involving fund units) and the types of transactions which can be carried out by the manager;

- if significant, the reference parameter – It is the indicator which the return of the client’s portfolio can be compared against;

- any leverage effect  – The intermediary will have to inform us whether it intends to avail of this possibility;

- any management proxy – The intermediary must inform us whether it intends to delegate the management to third parties;

- the method and the frequency of the valuation of the financial instruments;

- the loss threshold beyond which the client must be alerted.

This information must also be indicated in the contract.

The obligations of the manager also include that of avoiding or correctly handling the conflicts of interest and of informing us thoroughly in this connection (to learn more on these matters, see Part I).

In addition to deciding which securities to purchase or sell, the intermediary must also trade them. It may take steps to do so alone, or transmit the orders to another authorized intermediary. In any event, it will have to apply every measure for achieving the best possible result.

Delegating the management of our assets to a specialized intermediary could be a good idea. But in any event it should be checked. For such purposes, the client receives – at least every six months and in hard copy – the report on the management activities.

Let’s agree: reports are never thrilling documents. But are we sure that we do not really want to know what the intermediary is doing with our money?

Let us therefore dedicate a few minutes to this document. We can find out about:

• the securities contained in the portfolio and their valuation;
• the cash balance at the beginning and at the end of the period;
• the total of the costs payable by the client with indication of the individual items (upon request, the intermediary will have to provide an even more detailed recapitulation);
• the return achieved in the period compared with that of the reference parameter;
• the amount of the dividends, interest and other payments received in the period;
• the details of the transactions carried out in the period. In particular, the day and the time of execution, the type of order, the execution venue, the quantity, the unit price and the total price will have to be communicated. This information, upon the request of the client, can be provided as and when for each individual transaction;
• the rights conferred by the portfolio securities (for example, the right to take part in the general shareholders’ meetings in the case of shares, or the right to acquire securities in the case of convertible bonds, etc.).

The rule is that the report should be sent every six months. In some cases, it is by contrast forwarded:

- every three months if the client expressly requests this;

- at least once a month if the contract with the intermediary authorizes the management of a portfolio characterized by leverage;

- at least every twelve months if the client has also asked to receive the information from time to time on the individual transactions carried out by the manager.

The intermediary also has another obligation: it must promptly inform us of any losses which exceed the threshold indicated in the contract: an additional instrument for keeping its activities under control.

7. Investment advice

If we do not have a particular flair for investments, maybe it is better to let ourselves be assisted by an advisor.

Investment advice is an investment service where the advisor, upon his own initiative or on the request of the client, provides personalized advice or recommendations regarding one or more transactions relating to a specific financial instrument.

Personalized advice and recommendations means that these are presented as adapted to the client or based on their characteristics. Recommendations and advice targeted at the public by means of the mass media (newspapers, television, internet, etc.) are therefore not advisory services.

Furthermore, the recommendations and advice must suggest the purchase, sale, exchange or maintenance of a specific financial instrument.

Those suggestions which the intermediaries normally provide that are not associated with a specific financial instrument but a type of financial instrument (shares, bonds, fund units, etc.) or the composition of a portfolio (slightly more shares, slightly less bonds, favouring the American market rather than the Asiatic one, etc.), do not represent investment advice in a strict sense, but rather general advice.

These activities can be a preparatory and instrumental moment for all the investment services (and especially advice in the strict sense) and the intermediaries, in providing them, must observe the rules envisaged for the service which they are offering.

Intermediaries, also via financial advisors, and the individuals in possession of particular professionalism, respectability, independence and financial soundness requisites, enrolled in a specific register of financial consultants, can provide investment advice.

Advice in the strict sense ensures an elevated degree of protection, because it places the professionalism of the advisor at the service of the investor, an advisor who will suggest only operations deemed adequate, also undertaking responsibility for the same.

In order to seriously perform the task, the intermediary must ask the client for certain information: it is not possible to establish whether an operation is adequate if you are not aware of the client’s knowledge or experience of investments, their financial situation and the investment objectives.

Without this information, the intermediary cannot recommend anything to us and, therefore, must refrain from providing us with the service (in order to learn more on the assessment of the adequacy, see Part I).

In addition to assessing the adequacy, the advisor will have to provide us with all the information necessary for avoiding or correctly handling the conflicts of interest (to learn more on these matters, see Part I).

As a rule, a link between the provision of the advisory service and the provision of other services (order execution, reception and transmission or placement) can be found, in the sense that whomever, for example, executes the client’s order also provides them with the advisory service.

An important aspect of the advice is the relationship which links the advisor to the company which issues the products he recommends.

In fact, it may occur that the party which provides the advice is the issuer of financial instruments (or other companies in the same group are): for example, a bank belonging to a group which a mutual fund management company also belongs to.

It may also occur that the advisor receives incentives (under the form of payments, fees or non-monetary benefits) from the company which issues the advised products (to learn more on the incentives, see Part I).

These are situations which the advisor must handle correctly and which it must inform us of. Let us assess this information: nothing stops us from choosing the advisor we believe is in the best position for operating absolutely independently from among several advisors.

8. Accessory services

The parties authorized to provide investment services can also provide the following accessory services:

- custody and administration of financial instruments;

- rental of safety deposit boxes;

- granting of loans for carrying out transactions relating to financial instruments in which the party who grants the loans takes part;

- advice to businesses concerning financial and industrial structure and regarding the merger and buy-out of businesses;

- services associated with the issue or the placement of financial instruments;

- research on the subject of investments, financial analysis or other forms of general recommendation regarding financial instruments;

- trading intermediation associated with the provision of investment services.

In order to provide accessory services, in contrast to investment services, no authorization is required and, therefore, parties not authorized to provide investment services can also provide such services. If, however, these services are provided by authorized intermediaries, the latter must observe the rules of conduct envisaged for investment services.