Many Series 63 test questions use scenarios that registered persons encounter with investors.
Some of those scenarios mention account features and account registrations. This chapter covers those topics so you can recognize what’s happening in those questions. If you’ve already prepared for the SIE, Series 6, 7, 65, or 66 exams, much of this will feel familiar.
Investment accounts can include features such as check writing, option trading abilities, margin, and cash management. The key feature in this section is trading authorization.
If an account owner wants a third party to act on their behalf, the owner can grant a power of attorney (POA).
Limited POA allows the third party to place trades (buy and sell securities) for the account owner. However, the authorized person cannot request withdrawals.
Full POA allows the third party to place trades and request withdrawals.
If the POA is non-durable, it ends if the account owner becomes incapacitated (for example, a medical coma or mental incompetency). No matter the cause, incapacitation revokes a non-durable POA.
A durable POA remains in effect even if the account owner becomes incapacitated.
A POA always ends if the account owner dies. At that point, the executor of the estate takes control of the decedent’s (deceased person’s) assets. A POA can also be revoked at any time by the account owner.
We’ll discuss the following account registrations in this section:
An individual account is owned by one person. This account type can also be registered as transfer on death (TOD), which adds a listed beneficiary (or beneficiaries). TOD designations avoid probate and transfer directly to the beneficiaries when the account owner dies.
Probate court is the legal process for distributing assets after a person dies. When an account has no beneficiary, it generally falls under probate court jurisdiction. Whether the decedent had a will or not, the court oversees the distribution process and appoints the person who will manage the estate.
Probate can be time-consuming and complex, so many investors try to reduce the number of assets that must go through it. TOD accounts bypass probate and typically require only a death certificate for the beneficiaries to claim the account.
If an individual account does not have a TOD designation, it becomes part of probate. To take control of the account, the executor or administrator of the estate must provide court documents showing their authority. Executors and administrators are empowered by the probate court to act on behalf of the estate. They’re responsible for paying the decedent’s debts and distributing remaining assets to beneficiaries.
Even if someone is named as executor in a will, the probate court must officially appoint them. After the executor receives the court appointment document, they submit it to the financial firm to gain control of the decedent’s account.
Accounts with more than one owner are joint accounts. The two primary types are joint with rights of survivorship and tenants in common.
Joint with rights of survivorship (WROS) accounts provide equal ownership rights to all owners. If one owner dies, the surviving owner(s) automatically own the entire account. For example, if John and Stacey own a joint WROS account and John dies, Stacey becomes the sole owner. As long as at least one owner is still living, joint WROS accounts avoid probate.
Joint WROS accounts may also include a transfer on death (TOD) designation. In a joint account, TOD applies only if all owners die. If that happens, the assets pass to the listed beneficiaries. If there is no TOD designation, the account becomes property of the estate of the last living account owner (and is subject to probate).
Joint accounts may also be registered as tenants in common (TIC). TIC accounts assign specific ownership percentages to each owner. If one owner dies, that owner’s percentage goes to their estate and is handled through probate. For example, if Jim owns 40% of a TIC account and Jada owns 60%, and Jada dies, her 60% becomes part of her estate and goes through probate. Jim keeps his 40% and moves it to an individual account in his name.
Regardless of the type of joint account, WROS and TIC accounts operate the same while all owners are alive. Even if there are 15 owners, any one owner can submit trading instructions, receive all mail, manage the account, and request withdrawals without permission from the other owners. However, any check issued from the account must include all owners’ names, regardless of who requested the check.
We first learned about fiduciary duty when discussing the disclosures investment advisers make to clients. A fiduciary must put the client’s interests ahead of their own and act in the client’s best interest. Every account type in this section shares that core requirement.
Fiduciary accounts are governed by the Uniform Prudent Investor Act (UPIA). The UPIA requires fiduciaries to invest primarily in a safe manner, using a holistic (big-picture) view of the portfolio. The UPIA does not ban any specific asset class. For example, if you’re managing money for a risk-averse investor, the portfolio could still include a few aggressive investments as long as the overall structure remains conservative. A fiduciary’s performance is judged on the portfolio as a whole, not on one or two individual positions.
The UPIA also explicitly emphasizes diversification. Diversification means spreading investments across multiple asset classes (e.g., stocks, bonds, real estate) and across individual securities. Diversification reduces non-systematic risk, which is risk tied to a single company or a small segment of the market.
We’ll discuss these fiduciary registrations in this section:
A discretionary account gives a financial professional trading authority. Investment advisers and investment adviser representatives (IARs) commonly use these accounts when actively managing client assets. When a firm has discretionary authority, it can make investment decisions proactively for the customer.
A POA is required for discretionary accounts. Advisers typically obtain limited POA (also called limited trading authorization) to avoid taking custody. Remember: a person is considered to have custody if they can withdraw funds from a client’s account, and custody triggers additional requirements.
A discretionary order is one where the financial professional makes a decision for the customer about any of the following:
Asset - What security is being bought or sold
Action - If the security is being bought or sold
Amount- How many shares or units are being bought or sold
Many test takers remember this as the “AAA” rule. If the financial professional chooses the asset, action, and/or amount, the order is discretionary and requires a POA.
Some choices can be made without turning the trade into a discretionary order. The following can be decided without POA or discretionary status:
A financial professional may choose the price and/or time without the order being considered discretionary. However, the trade must be completed within one day to keep its non-discretionary status. If it takes more than one day to complete, the order becomes discretionary and requires a POA.
Discretionary accounts are often marketed as wrap accounts. These accounts typically bundle services such as asset management, trade execution, and general account maintenance. Instead of paying separate fees for each service, the customer pays one “wrapped” fee.
Wrap accounts are investment advisory products and may be offered only by investment advisers and IARs. If a broker-dealer or agent wants to offer wrap accounts, the broker-dealer must be dual-registered as an investment adviser, and the agent must be dual-registered as an IAR.
Custodial accounts are opened for minors under age 18. An adult custodian opens the account and manages the assets on the minor’s behalf, but the assets belong to the minor. Custodians are typically parents, but they can be any adult. Only one custodian and one minor are allowed per custodial account.
If a person can’t manage their own finances, a court may appoint a guardian to oversee that person’s assets. Guardianship accounts typically involve mental incapacitation or an inability to manage money. A financial firm opens a guardianship account after receiving the proper court appointment documents. The account owner’s assets are then placed into the guardianship account and may be managed only by the court-appointed guardian.
A trust account is created for the benefit of a specific beneficiary. A trust is a legal entity with three distinct parties, each with different responsibilities:
The grantor creates and funds the trust. Creating a trust typically starts with the grantor working with legal counsel to draft a trust agreement. The trust agreement states the trust’s objectives, how it should be managed, and who the beneficiary (or beneficiaries) will be. Trust objectives vary widely, such as funding a child’s college education, supporting an elderly family member, or managing assets for a charity.
The grantor also names trustees in the trust agreement. Trustees manage the trust according to the grantor’s instructions. When a trust account is opened at a brokerage firm, trustees manage trust assets by trading securities and handling general transactions (for example, distributing funds to beneficiaries).
A trust is managed solely for the benefit of its beneficiaries, which may be a person, multiple people, or an organization. Beneficiaries don’t have legitimate control over the trust because trustees are in charge. However, trustees serve the trust and its beneficiaries. The beneficiary’s role is limited to receiving the trust’s benefits (for example, cash distributions or assets).
Trust accounts are fiduciary accounts, but they aren’t subject to the typical “safe” fiduciary standards (for example, investing only in low-risk securities). Trustees may pursue riskier strategies if the trust agreement requires or permits them. Trust accounts may also be opened as margin accounts (allowing the trust to invest borrowed funds) if the trust agreement specifically authorizes margin. When a trust account application is submitted, the brokerage firm requests the trust agreement to confirm whether margin is permitted.
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