Asset Management

Asset management is nowadays one of the core financial services which banks offer for assets deposited with them (so-called internal asset management) and which is also being offered by third parties (so-called external asset management).

Thereby the investor delivers to the asset manager part of his assets, which the asset manager is to manage independently, however always within the framework of what has been agreed previously with the investor. The right to decide which investment tools are to be used for implementing the investment strategy and for reaching the investment target is solely with the asset manager.

Contrary to the investment consultant, the asset manager is hence entitled to take any necessary management decisions (such as to purchase and sell securities), however only within the framework of what has been agreed previously with the investor.

The principle of accurate consulting

The asset manager is responsible for the true and accurate exercise of his duties towards the client. He is bound to implement any asset management according to his client`s guidelines.

The duty of care is defined by objective criteria: The benchmark is set at how an average, conscientious asset manager would carry out his duties. The benchmark in respect to professional knowledge is raised once the asset manager exercises his duty as a career and charges a fee, which is the norm.

The liability of the asset manager is initiated by careless and disloyal exercise of his duties which results in harming the investor.

However, the asset manager is not responsible for the investment`s lack of success, which the client hoped to be successful. If the asset manager carries out a careful and complete analysis of the client`s requirements and thus suggests a reasonable investment strategy, he would neither be responsible for any negative market developments nor for the fact that the client did not make a profit or even lost money.

Duties in detail

The asset manager may only accept the mandate if he is adequately qualified and has a reasonable organization and the necessary tools in place.

The asset manager`s duties comprise:

Client profile (Know-Your-Customer): The asset manager is to talk to the client in person in order to gain an overview of the client`s living conditions. He especially must clarify his client`s ability and willingness to take risks. Information gathered and any conclusion drawn from it are to be summarized in a written know your customer report;

Duty to keep records: The mandate for asset management, the client profile and any special instructions given by the investor must set down in writing;

Choice of investment type: The asset manager is to suggest the type of investment which best matches the client`s requirements as revealed by the client profile. He must discourage the client from any unreasonable investment;

Consulting and clarification: The asset manager is to clarify in detail any risks arising from investment strategies which he suggests further to the client profile;

Gathering of information: Information for preparing an investment strategy is to be gathered carefully;

Reduction of risks: The risk of stock market development should be minimized by using approved investment guidelines and in particular in order to avoid concentrations of risk sufficient diversification should be undertaken.

Monitoring: The assets under management must be monitored constantly in terms of the agreed investment objective and the risk profile. If the investor’s profile changes from the initial position then an adjustment of the investment strategy must be considered.

Being answerable and criticism: Special instructions are to be adhered to. However, if instructed unreasonably or contrary to the agreed upon terms, the client must be put on notice. Any implementations of unreasonable instructions have to be declined.

Avoiding conflicts of interest: Conflicts of interest are to be avoided. When it comes to unavoidable conflicts, a reasonable balance of interest is to be created. Recessions are to be disclosed in advance or handed over.

Written Accountability: The asset manager has to account in writing. Accounting statements and performance reports have to be sent periodically to the investor to deliver a constant periodic representation for comparison purposes. The asset manager must develop performance reports in accordance with his professional knowledge.

Responsibilities of the asset manager in principle

An asset manager becomes responsible if he carelessly carries out management orders given by the client.

Breaching the asset management contract serves as base for his liability. In addition thereto, the breach, however, has to result in a damage suffered by the client.

From a legal point of view the following accumulative elements give rise to liability:

• Breach of contract;
• Damage;
• Causation between breach of contract and damage;
• Blame, will then be assumed

Only if all preconditions are being met, will the asset manager`s liability be established and an injury suffered by the investor may be enforced with legal assistance.

Breach of contract

Careless exercise of an order for asset management is legally viewed as a breach of contract.

Thereby the first conversation with the asset manager may even give rise to a liability: If the asset manager did not clarify the client`s requirements carefully and did not point out the risks of the chosen investment strategy or suggested a strategy which was too aggressive and likely to result in losses, this would qualify as a breach of contract.

If the asset manager exceeds his authority by purchasing risky investment tools although his instructions read differently, this may qualify as breach of contract. If the asset manager is to only invest in bonds and he nevertheless invests in shares, his actions will constitute a breach of contract.

Also, failure to monitor the investments constantly or to inform the investor about any threatening loss has to be considered as careless breach of contract which gives rise to liability. If the asset manager becomes aware that certain shares against all expectation will develop negatively and he fails to inform the investor accordingly, such negligence may constitute a breach of contract.

Thereby it has to be considered, that not every breach of contract results in an injury: If the asset manager contrary to the agreed upon strategy invests in a product which subsequently due to market conditions makes a profit, he will breach the asset management contract however such breach does not result in an injury.

Damage

The Swiss Federal Court defines damage as an involuntary loss of assets, which may present itself in a reduction of assets, in an increase of liability or in loss of profit. The damage equals the difference between the current status of assets and the status the assets would have enjoyed had the harmful event not happened.

To determine the damage, the assets delivered within the frame of the asset management contract are decisive. These will be compared to the asset status which has been caused by the breach of contract. Sometimes an unrealized profit has to be included into the damage calculation.

Further it has to be differentiated whether the damage was caused in pursuit of an investment strategy which was contrary to duty (careless management of the whole portfolio, unsuitable investment strategy) or by a single investment contrary to duty (careless attitude in connection with a single item of a portfolio, purchase of risky options which were not permitted in the contract).

The type of breach of contract therefore may have direct results on the type of damage calculation; hence this point is to be reviewed carefully.

Causation

Between breach of contract meaning the careless actions of the asset manager and the loss suffered, there has to be causation. Only this inner connection qualifies a simple damage to be a legally qualifying damage.

If the investor for example instructs the asset manager to sell certain securities and the asset manager fails to comply, there is a connection between the non-compliance with the purchase order and any subsequent collapse of prices. The investor may now claim damages being the difference between the current value at the time when the asset manager should have sold and the actual sales price.

The same applies if the asset manager suggests an unsuitable and too risky investment strategy for an investor, who depends on the return from his assets in order to cover his living expenses. In the event that the investor suffers losses, the advice to invest in the shares was causal for his losses.

Indicators of faulty asset management

Certain signs may indicate faulty consulting or faulty exercise on the asset manager`s part, which more than often cause a damage and give rise to the asset manager being liable.

INDICATIONS OF INADEQUATE CONSULTING

The following circumstances may indicate inadequate consulting:

• No or only a rudimentary analysis of the investor and his requirements:
• Missing investor profile;
• Promises of high returns with an alleged minimum of risk;
• Emphasizing the chances while ignoring the risks;
• Suggestion of investment strategies and investment tools which the asset manager is not able to explain in a comprehensible way;
• Suggestion of investment strategies and investment tools which originate exclusively from a bank;
• Advertising of “revolutionary investment tools” with which the investor allegedly “always gains a profit”;
• Substantial investments in foreign currencies, although the investor has an exclusive focus on Switzerland;
• Raising of loan capital (so-called Lombard loans), which is to be invested jointly with the investor`s own capital and which is meant to give high returns;
• Missing information on inducement offers.

INDICATIONS OF INADEQUATE IMPLEMENTATION

The following facts may indicate an inadequate implementation of asset management:

• High losses;
• High losses are being glossed over (“Only after the products have matured will the final accounting be done”);
• Policy of incomprehensible or missing information;
• Poor accessibility on the asset manager`s part;
• Failure on the asset manager`s part to explain the investment`s negative development;
• Invitation to invest additional funds when losses occur (“Now you are able to acquire the same product for half its price and therefore to reduce your loss”);
• High fees, broker’s fees and costs of other third parties by which the net profit is reduced;
• A high number of transactions which incur high fees (so-called “churning“).