Account Registrations and Ownership

Individual and joint accounts

A single or individual account has one owner, who alone may give instructions. On death, the assets pass to the estate and are distributed under the will or the intestacy laws of the state.

A joint account has two or more owners, all of whom may give instructions and trade. Both forms below share that feature, and both require that mail be sent to one address agreed by the parties and that any cheque be payable to all owners.

Joint tenants with right of survivorship — JTWROS — gives each owner an undivided equal interest. On the death of one owner, the entire account passes automatically to the survivors, outside the estate and without probate. It is the standard registration for spouses.

Tenants in common — TIC — gives each owner a stated fractional interest, which need not be equal. On death, the decedent's fractional share passes to their estate rather than to the other owner. It is used where the owners are not spouses and want their share to go to their own heirs.

The exam's question is nearly always which registration sends the deceased owner's share to the estate. That is tenants in common; JTWROS sends it to the survivor.

Community property registration exists in a minority of states and treats property acquired during a marriage as owned equally by both spouses, with consequences for both control and estate treatment.

Transfer on death registration — sometimes called a payable on death account — lets an individual name beneficiaries who receive the assets directly on death, bypassing probate. The owner retains complete control during life and may change the beneficiaries at any time; the beneficiaries have no rights and no access until death. It gives much of the probate-avoidance benefit of a joint account without giving anyone else control while the owner is alive.

On the death of any account owner, the firm must be notified, the account is frozen pending documentation, open orders are cancelled, and the firm requires the death certificate, appropriate legal documents such as letters testamentary, and any required tax waivers before releasing assets.

Custodial accounts

A minor cannot enter a contract and therefore cannot own a brokerage account directly. Custodial accounts under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act solve this.

One custodian, one minor, one account. The custodian manages the account for the minor's benefit; the minor is the beneficial owner and the account is registered under the minor's social security number, so the income is taxed to the minor.

Gifts to the account are irrevocable. The custodian cannot take the property back, cannot use it for their own benefit, and cannot use it to satisfy their own legal obligation to support the child. Expenditures must be for the minor's benefit.

Custody ends and the assets transfer to the former minor outright at the age of majority set by the state — which for UTMA accounts may be later than for UGMA. At that point the young adult may do whatever they like with the money, and it is a conversation worth having with a parent before the account is opened.

Custodial accounts must be cash accounts. Margin trading, uncovered option writing and speculative strategies are inconsistent with the prudent standard applied to a custodian, and the account may not be pledged. The custodian may not open a margin account for the minor.

A 529 plan is the other common vehicle for the same objective, and lesson 9.4 covers it.

Fiduciary, trust and entity accounts

A fiduciary account is managed by someone acting for another's benefit — an executor of an estate, a trustee, a guardian, a conservator, a receiver, or a custodian.

A trust account requires the trust document, or a certification of trust, establishing who the trustees are and what powers they have. The firm's obligation is to act within those powers: a trustee whose document does not authorize margin may not open a margin account, whatever they instruct. FINRA Rule 2090's requirement to know the authority of each person acting on behalf of the customer is doing the work here.

An estate account requires letters testamentary or letters of administration appointing the personal representative.

A corporate account requires a corporate resolution identifying the officers authorized to trade, and for margin or options, evidence that the corporate charter and bylaws permit it — many do not.

A partnership account requires the partnership agreement, and specifically the provisions naming who may trade and whether margin is permitted.

A sole proprietorship is legally the individual, so the account is an individual account operated under the business name. Unincorporated associations — clubs, some non-profits — require the organizing document and evidence of authority.

Fiduciaries are generally held to a prudent standard, and in some states to a legal list of permitted investments. Speculative strategies, uncovered option writing and margin are generally inappropriate for a fiduciary account unless the governing document plainly authorizes them.

Institutional and specialized accounts

A prime brokerage arrangement lets an institutional customer execute through several executing brokers while clearing, settling and custodying everything at a single prime broker. It consolidates financing, margin and reporting, and requires an agreement among the customer, the prime broker and each executing broker.

Delivery versus payment and receive versus payment accounts — DVP/RVP — settle each transaction against simultaneous payment or delivery at a bank or other custodian rather than in the brokerage account. They are institutional by nature, and are the standard arrangement for pension plans and investment advisers whose assets sit with a custodian.

An advisory or fee-based account charges an asset-based or flat fee rather than commissions. The suitability question is straightforward and is asked on the exam: a fee-based account is appropriate for a customer whose trading activity justifies the fee, and inappropriate — reverse churning — for a customer who trades rarely and would pay far less in commissions.

A discretionary account is one where someone other than the owner may enter orders without prior consent for each trade; it is covered in the next lesson because the documentation and supervision are substantial.

Numbered or coded accounts are permitted, provided the firm holds a written statement from the customer attesting to ownership. The firm always knows who the customer is; only the account designation is coded.

A note on account changes: any change to the name or designation of an account requires principal approval and documentation under FINRA Rule 4515, and an internal transfer between registrations is not a bookkeeping matter — moving assets from a joint account into an individual one changes ownership and may be a taxable gift.