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Introduction
1. Supervision
2. Registrations
3. Client issues
4. Investment products
5. Margin accounts
6. Federal rules and regulations
Wrapping up
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3.3.1.1 Single owner accounts
Achievable Series 10
3. Client issues
3.3. Accounts
3.3.1. Account types
Our FINRA Series 10 course is currently in development and is a work-in-progress.

Single owner accounts

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There are multiple types of accounts, and even multiple categories. Accounts could be registered to a single person, or they could be registered to more than 1 person.

Single-owner accounts

Cash account

The simplest of all accounts. These are accounts that are 100% owned, as if purchased in cash.

Margin account

Margin accounts are not 100% owned. The client has borrowed some money. These are the only accounts where investors can short stock, but you can also use margin to leverage your money in long positions. Margin accounts are discussed in more detail in their own section.

Day trading

We discuss day trading in a bit more detail in the margin sections. Basically, a pattern day trader is a person who executes 4 or more day trades within 5 business days (provided it is more than 6% of total trading activity). A day trade is when a position is opened and closed within the same day; a long position is opened and then sold in the same trading day, or a short position is opened and then purchased in the same trading day. They have more strict margin requirements, again, discussed in the margin sections.

Discretionary account

An account in which the representative has discretion. These could be discretionary cash accounts or discretionary margin accounts. We discuss discretion itself in the foundational supervision section. Basically, it is where the registered representative can make decisions about the transactions regarding the 3 A’s: action, asset, and amount. In most cases, the rep will meet with the client once or twice a year, or however often, review everything with them, listen to their thoughts, ideas, hopes, dreams, fears, and make decisions over the next period based on that updated profile. The client can always call and place direct transactions themselves, but most of the time the representative decides all activities, adhering to the customer’s financial objectives and risk tolerance.

There is a great deal more oversight required from a supervisory perspective. These accounts could be at risk more easily for churning and over trading, as the client isn’t the one placing the orders, and the person placing the orders might be getting paid on those orders being placed. There is an inherent potential conflict of interest that must be monitored.

Wrap accounts

Wrap accounts are accounts that “wrap” multiple services together for the client. There could be many services, but the most common are execution, carrying, advice, and research. It must be disclosed that the fee for these combined services may actually be higher than the combination of the fees from the individual services separately. Some experienced reps may only work by wrap account, so the client wants that particular experienced rep; they are potentially paying more for that specific representative. They don’t want the reps with 2-3 years of experience; they are willing to pay the higher fee for the rep with 20 or more years of experience.

Oftentimes, wrap accounts include advice, so we are dealing with advisory rules. If a broker-dealer is marketing certain advisory products directly to customers, it must be registered as an investment adviser. In many cases, in the real world, representatives handling these types of accounts and/or services would be registered both with your firm’s broker-dealer (ACH Financial Services Inc., or something), along with your firm’s investment advisor (ACH Investment Advisors Llc, or something), therefore, in the real world, eliminating the need.

Broker-dealers themselves, though, as stated, would have to register if they cross the line. Basically, if the advice is incidental and they are not paid (“listen, Mr. and Mrs. Prospect, you should increase your 401k contribution to get the biggest match”), they will not have to register. Advice would be incidental for the broker-dealer as long as the firm does not;

  • Charge clients a separate fee for advice and/or require they sign a separate contract
  • Hold themselves out as a financial planner, or offer advice as part of some type of “financial plan”
  • Have investment discretion on the account.

There is a reason that if you have a discretionary account, your firm almost assuredly requires you to have a Series 65 or Series 66 license. That way, you are registered as an investment adviser.

Business accounts

When the account is in a business, partnership, or similar structure, the documents aren’t really that different than with individuals. You will need the identification documents of the company, the corporate charter, list of all authorized traders (not all employees can trade the company money), and any other requirements of the account.

One of the potential tricks comes with margin, and the difference between margin in a business account vs margin in a trust account. In a business account you are permitted, unless the documents say you can’t. In a trust you are NOT permitted, unless the documents say you CAN. It is the idea of what is the default, and if documents change it. Business is yes margin by default, trusts are no margin by default.

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Single owner accounts

There are multiple types of accounts, and even multiple categories. Accounts could be registered to a single person, or they could be registered to more than 1 person.

Single-owner accounts

Cash account

The simplest of all accounts. These are accounts that are 100% owned, as if purchased in cash.

Margin account

Margin accounts are not 100% owned. The client has borrowed some money. These are the only accounts where investors can short stock, but you can also use margin to leverage your money in long positions. Margin accounts are discussed in more detail in their own section.

Day trading

We discuss day trading in a bit more detail in the margin sections. Basically, a pattern day trader is a person who executes 4 or more day trades within 5 business days (provided it is more than 6% of total trading activity). A day trade is when a position is opened and closed within the same day; a long position is opened and then sold in the same trading day, or a short position is opened and then purchased in the same trading day. They have more strict margin requirements, again, discussed in the margin sections.

Discretionary account

An account in which the representative has discretion. These could be discretionary cash accounts or discretionary margin accounts. We discuss discretion itself in the foundational supervision section. Basically, it is where the registered representative can make decisions about the transactions regarding the 3 A’s: action, asset, and amount. In most cases, the rep will meet with the client once or twice a year, or however often, review everything with them, listen to their thoughts, ideas, hopes, dreams, fears, and make decisions over the next period based on that updated profile. The client can always call and place direct transactions themselves, but most of the time the representative decides all activities, adhering to the customer’s financial objectives and risk tolerance.

There is a great deal more oversight required from a supervisory perspective. These accounts could be at risk more easily for churning and over trading, as the client isn’t the one placing the orders, and the person placing the orders might be getting paid on those orders being placed. There is an inherent potential conflict of interest that must be monitored.

Wrap accounts

Wrap accounts are accounts that “wrap” multiple services together for the client. There could be many services, but the most common are execution, carrying, advice, and research. It must be disclosed that the fee for these combined services may actually be higher than the combination of the fees from the individual services separately. Some experienced reps may only work by wrap account, so the client wants that particular experienced rep; they are potentially paying more for that specific representative. They don’t want the reps with 2-3 years of experience; they are willing to pay the higher fee for the rep with 20 or more years of experience.

Oftentimes, wrap accounts include advice, so we are dealing with advisory rules. If a broker-dealer is marketing certain advisory products directly to customers, it must be registered as an investment adviser. In many cases, in the real world, representatives handling these types of accounts and/or services would be registered both with your firm’s broker-dealer (ACH Financial Services Inc., or something), along with your firm’s investment advisor (ACH Investment Advisors Llc, or something), therefore, in the real world, eliminating the need.

Broker-dealers themselves, though, as stated, would have to register if they cross the line. Basically, if the advice is incidental and they are not paid (“listen, Mr. and Mrs. Prospect, you should increase your 401k contribution to get the biggest match”), they will not have to register. Advice would be incidental for the broker-dealer as long as the firm does not;

  • Charge clients a separate fee for advice and/or require they sign a separate contract
  • Hold themselves out as a financial planner, or offer advice as part of some type of “financial plan”
  • Have investment discretion on the account.

There is a reason that if you have a discretionary account, your firm almost assuredly requires you to have a Series 65 or Series 66 license. That way, you are registered as an investment adviser.

Business accounts

When the account is in a business, partnership, or similar structure, the documents aren’t really that different than with individuals. You will need the identification documents of the company, the corporate charter, list of all authorized traders (not all employees can trade the company money), and any other requirements of the account.

One of the potential tricks comes with margin, and the difference between margin in a business account vs margin in a trust account. In a business account you are permitted, unless the documents say you can’t. In a trust you are NOT permitted, unless the documents say you CAN. It is the idea of what is the default, and if documents change it. Business is yes margin by default, trusts are no margin by default.

More from Account types

  • Multiple owner accounts