Investment Advisory Contracts


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On 16 April 2018 (4A_586/2017), the Swiss Federal Supreme Court issued a decision regarding investment advice. This judgment provides us with the opportunity to present some key aspects of investment advisory contracts.

1. What contractual relationships exist in accordance with the practice of the Swiss Federal Court for handling stock exchange transactions and investment activity?

According to the practice of the Federal Supreme Court, three different contractual relationships are generally considered for executing stock exchange transactions or investment activity: a pure account/deposit relationship, one for investment advice and one for actual asset management (Federal Supreme Court, judgment of 16 April 2018, 4A_586/2017, E. 2.1).

2. What is the difference between asset management agreements, investment advisory agreements and an account/deposit relationship according to the practice of the Swiss Federal Court?

With an asset management agreement, the client instructs the bank to independently manage certain assets for a fee within the framework of the agreed investment strategy and in order to achieve the client’s personal investment objective (Federal Supreme Court, judgment of 16 April 2018, 4A_586/2017, E. 2.1.1).

With investment advice it is the case that the client is responsible for the investment decision, whereas with asset management it is the bank itself who determines the transactions to be executed within the framework of the duty of care and loyalty and the agreed investment strategy (Federal Supreme Court, judgment of 16 April 2018, 4A_586/2017, E. 2.1.1).

An investment advisory agreement distinguishes itself from the pure account/deposit relationship in that the client makes the investment decisions himself, but the bank assists him in an advisory capacity (Federal Supreme Court, judgment of 16 April 2018, 4A_586/2017, E. 2.1.1).

3. What is investment advice?

Investment advice is the provision of individual advisory services for clients in the areas of money and capital investment and the associated provision of guidance and recommendations. Investment decisions are not made by the investment advisor, but by the client himself who decides whether or not he wishes to implement the advice and recommendations received and – possibly on the basis of this advice – issues any concrete instructions for the purchase or sale of investments. The advice and recommendations given by the investment advisor must be appropriate to the assets and the investor and thus include both a subjective assessment of the investment by the advisor and a recommendation geared to the personal needs of the investor, for example a buy, sell or hold recommendation. This sets the consultation apart from information and clarification. Whoever is obliged to provide information owes a pure statement of facts; whoever is obliged to provide clarification owes not only the statement of facts but also its explanation; whoever is obliged to provide advice owes an additional subjective assessment based on the information and a recommendation suitable for investors […]. Investment advisory agreements are subject to procurement law, and not only exist if the parties explicitly agree on them, but also – impliedly – if due to an ongoing business relationship between the bank and the client a special relationship of trust has developed from which the client may also expect unsolicited advice and a warning in good faith (so BGE 133 III 97 ff., 103). (Oliver Arter, Anlageberatungsvertrag: Informations-, Aufklärungs-, Beratungs-, Warn- und Überwachungspflicht. Schweizerisches Bundesgericht, I. Zivilabteilung, Urteil vom 3. Februar 2012 i.S. X. c. Y., (BGer 4A_525/2011), AJP 2012, 1316 ff., 1322).

4. Are there any due diligence and loyalty obligations when punctually executing investment transactions in the context of a pure account-deposit relationship?

If a bank only (selectively) carries out stock exchange transactions for the client (execution-only relationship/pure account-deposit relationship), it is not obliged to protect the client’s general interests.

However, according to federal court rulings, due diligence and fiduciary duties, which oblige the bank to protect further interests, exist on an exceptional basis in three cases in the case of pure account/deposit relationships:

  • the customer requires clarification or advice in the run-up to a planned transaction;
  • a bank must, with due regard, realize that the customer has not recognized a certain risk associated with the investment;
  • a special relationship of trust has developed between the bank and the customer in an ongoing business relationship, from which the customer may also expect unsolicited advice and a warning in good faith.

If one of these circumstances exists, the bank shall exercise due diligence and fiduciary duties, the exact content and handling of which shall be determined in each individual case. (Arter, a.a.O., 1322).

5. How is the damage defined under Swiss law?

According to the general concept of damage, as used in the practice of the Federal Supreme Court, the damage is an involuntary asset reduction, which may consist of a reduction of the assets, an increase of the liabilities or in a lost profit. It corresponds to the difference between the current state of assets and the state of assets without the damaging event (Federal Supreme Court, judgment of 16 April 2018, 4A_586/2017, E. 2.2).

It should be noted, however, that the general concept of damage defined in this way must be put into concrete terms in individual cases so that it can provide useful criteria for calculating the damage. For the processing of investment transactions, for example, the following differentiation should be made:

  • On the one hand, damage can arise as a result of the negligent management of an entire portfolio by pursuing an investment strategy in breach of duty;
  • On the other hand, negligent conduct may be limited to individual and thus determinable non-compliant investments (Federal Supreme Court, judgment of 16 April 2018, 4A_586/2017, E. 2.2).

In the first case, the total assets handed over for administration must be taken into account. In the second case, however, only that part of the assets which was used for the negligent investments must be considered (Federal Supreme Court, judgment of 16 April 2018, 4A_586/2017, E. 2.2).

In both cases of improper performance (in accordance with Art. 398 para. 2 in conjunction with Art. 97 para. 1 CO), the interest to fulfil (positive interest) is to be replaced in principle because the investment advisory contract is subject to mandate law (Federal Supreme Court, judgment of 16 April 2018, 4A_586 / 2017, E. 2.2).

6. How is the loss measured if the entire portfolio has been negligently managed?

In the event that the entire portfolio has been negligently managed, the basis for calculating the loss is the comparison between the current level of assets under management (effective portfolio) and the level of assets that would have existed if the assets had been managed in the same period with due diligence (hypothetical portfolio). In this case, the loss or the hypothetical comparison portfolio can only be estimated (Art. 99 para. 3 in conjunction with Art. 42 para. 2 CO). As a general rule, in the comparison hypothesis, the diligence of an average successful asset manager during the same period must normally be taken into account (Federal Supreme Court, judgment of 16 April 2018, 4A_586/2017, E. 2.2.1).

7. How is the damage assessed if individual investments were made in breach of contract?

If individual investments have been made in breach of contract, the calculation of damages is limited to determining the difference between the actual value of the individual investments in breach of contract and the hypothetical value that the capital invested in breach of contract would have had if the investment in question had been in conformity with the contract. There is only an obligation to pay compensation for investments made in breach of duty. The liable person is not authorised to offset profits on investments made in accordance with professional standards against losses from investments made in breach of due care. Furthermore, it must be avoided that any losses on the part of the assets invested in accordance with the contract increase the obligation to pay compensation. Suitable alternative investments that correspond to the contractual investment strategy and would have been made by the contracting partner or an averagely successful asset manager or investment advisor are considered as a benchmark (Federal Supreme Court, judgment of 16 April 2018, 4A_586/2017, E. 2.2.2).


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