Broker/client relationship

What is a broker?

A broker (often called a stockbroker) is a person or firm that provides advice about shares and similar products. It is common for shareholders to use their brokers to obtain investment advice, for which the broker generally receives a commission.

Brokers must be qualified, including minimum years in an appropriate financial institution and designated tertiary qualifications.

Discount brokers

For some time now there has been a class of brokers commonly known as "discount brokers". In the main they simply execute the trade, which is why they are sometimes known as "execution-only" brokers.

Choosing a broker

Before you begin you should ensure you are able to explain your investment needs, including an inventory of your assets, your income and existing investments. This will ensure that the broker understands your situation and what you expect from their services.

The Australian Stock Exchange has a broker referral service. You can use this to assemble an appropriate short list of potential brokers. You should be careful to only deal with brokers who are registered with the Australian Security and Investments Commission. You can now search the database at the ASIC website (www.asic.gov.au) to check if the broker is licensed.

Who must be licensed
One of the significant effects of the Financial Services Reform Act is to introduce a uniform licensing scheme for people who engage in financial advice or provide financial services. Any business or person that offers or advises you about financial products must either be:

·        an Australian Financial Services (AFS) licence holder; or

·        a director or employee of an AFS licence holder; or

·        an Authorised Representative of an AFS licence holder.

Be careful to ensure the stockbroker has a licence, because otherwise you cannot be sure you are protected under the law.

Financial services guide

Your broker should give you a financial services guide (FSG) before you receive financial advice, or they buy or sell shares on your behalf. There are some exceptions where time is of the essence and the FSG must then be given to you within 5 days.

Broker as agent

According to the law a broker acts as your agent i.e. they act according to your instructions. Although in real terms they might be called more appropriately an "intermediary".

Reasonable care

Like all professionals, under the law a broker must act using reasonable care and skill when they act on your instructions. Nevertheless, this must be within the general nature of the instructions you have given e.g. a broker can only get the best price for your share within the parameters of the instructions you have given.

ASX Rules

The ASX Rules also deal with many other aspects of a broker's behaviour, including:

·        the keeping of records;

·        accounts and auditing;

·        reporting obligations of brokers;

·        rights of brokers when buyers default;

·        avoidance of a conflict of interest.

Contract between broker and client

Although there is a contract between the broker and the client, its precise nature depends on the written agreement. If the relationship is one where you are giving instructions simply to buy a particular share, you cannot also expect other advice that is not necessarily covered by this unless it is so obvious and reasonable as to go without saying, and it is necessary to give effect to the relationship between you.

Fiduciary relationship

A broker has a "fiduciary" relationship with their client. This means the broker has a legal obligation to make a full and accurate disclosure of the broker's own interest in the transaction. This is why the ASX Rules make it clear that the broker cannot have a conflict of interest. Under the law, a stockbroker must have a reasonable basis for any recommendation.

Client instructions

Within the limits of the law, a broker must carry out their client's instructions. This doesn't mean a broker should be responsible for ambiguous instructions, or that the broker should simply blindly follow your instructions without discussing them if they do not appear to be in your best interests.

Conflicts of interest

A broker must avoid situations which place them in a position where their duty to their client is at odds with their personal interests. This includes being in a position of conflict between different clients. The primary responsibility of a broker is to advise clients and act on their behalf in the purchase and sale of shares, so obviously they cannot trade in competition with those interests. Courts have long recognised the relationship that requires trust and integrity.

Similarly, a broker must tell a client of any information that might suggest the transaction is not in their interests.

They must also have a reasonable basis for recommending the stock.

LAW FOR YOU

Read this: This fact sheet is intended to be general information about the law in Australia. It is not a substitute for legal or other professional advice. Lawscape Communications Pty Ltd, Fairfax Interactive Pty Ltd or MoneyManager does not accept responsibility for loss to any person, who either acts or does not act because of this fact sheet.

© Lawscape Communications P/L

Last Updated – March 2007