MiFID II: A work in progress

Matt Ward examines how advisers are coping with MiFID II and the impact on their businesses

AKG assesses and monitors the strategic plans of companies operating across four sectors, as part of its core financial strength assessment work. This work includes consideration of responsiveness to regulatory change and challenge, providing AKG with a unique, independent market perspective.

The Markets in Financial Instruments Directive II (MiFID II) has impacted directly on two out of four assessment sectors – platforms and discretionary fund managers (DFMs).

What has been abundantly clear is that with MiFID II occurring in close proximity to the General Data Protection Regulation and the Senior Managers and Certification Regime, and with a Brexit overlay, industry and provider bandwidth has been seriously challenged.

AKG published a MiFID II research paper in June 2019, sponsored by Netwealth, which was informed by two separate but complementary market research exercises. Here we outline some of the key findings and implications from the adviser research.

IMPACT ON INTERMEDIARY BUSINESSES, ADVICE MODEL AND WORKLOAD

Have the additional MiFID II requirements resulted in you having to make any changes to your business model?

• Yes, I have increased minimum client portfolio size (16%).
• Not yet, but I am considering an increase to minimum client portfolio size (14%).
• No, but additional requirements have increased workload (66%).

Implications

• Obvious increase in workload for advisers.
• Impractical/uneconomical to service clients at certain level.
• Continued trend in advice moving ‘upmarket’.  

PRESSURE TO JUSTIFY COSTS

Have you experienced pressure from clients to justify costs and charges associated with their investment solutions?

• Yes (18%).
• No (75%).
• Unsure (7%).

Implications

• Some, but limited, pressure experienced to date.
• But pressure on costs being experienced across the wealth management value chain – acknowledged by platforms, DFMs.
• Advisers to experience this pressure on costs next?  

COSTS AND CHARGES DISCLOSURE – GREATEST DISCREPANCIES

In your experience, where are the greatest discrepancies in the standards of MiFID II reporting across the DFMs and/or platforms you use?

• Costs and charges (51%).
• Ex-ante and ex-post projections (37%).
• Clarity and transparency (30%).

Implications

• Clearly still work to do on disclosure of costs and charges.
• More disappointment evident with quality and clarity of post-sale costs and charges.
• Further industry collaboration and standardisation required.

COSTS AND CHARGES DISCLOSURE

Does the standard of reporting and transparency on charges and services influence your choice of preferred DFMs and/or platforms?

• Always (23%).
• Sometimes (39%).
• Never (38%).  

Have any of your clients switched investment solution/provider based on disclosure of costs and charges?

• Yes, a lot (1%).
• Yes, some (7%).
• Not yet, but I expect this will happen in the future (34%).
• No, and I do not foresee this happening in the future (58%).

Implications

• Enough evidence here for DFMs and platforms to target continuous improvements with reporting suite and transparency efforts.
• Further evidence to underline importance of adhering to MiFID II initiatives closely and expediently to ensure client retention.
• Ability to meet and exceed MiFID II requirements will be a differentiator.  

BENEFITS AND IMPLICATIONS

Despite implementation in January 2018, work to embed and meet MiFID II requirements clearly remains a work in progress, including the need for further adaptation to reflect requirements of the UK wealth management market and its value chain components/participants.

Crucially, client benefit needs to be seen and experienced, and adviser views appear split on this.  

Has MiFID II improved your clients’ understanding of their investment services and how they are being charged?

• To some degree (45%).
• No improvement (43%).
• Reduced understanding (11%).

Transparency of costs and charges is seen as the most beneficial MiFID II requirement for clients to date. Efforts to further improve transparency should be continued and aligned with ongoing asset management market study and other pertinent initiatives.

But the impact of the enhanced disclosure regime on the client experience needs to be fine-tuned, with requirements to:

• Strike the right balance – too much information might be counterproductive for clients.
• Resolve inconsistencies – inaccuracy and inconsistency will be counterproductive for clients.
• Improve ex-post reporting – evidently being impeded by deficiencies in data being provided.  

COLLABORATION, FUTURE MARKET FUNCTIONALITY AND SUCCESS

So far, many advisers do not feel that MiFID II has delivered on its objectives in relation to improving integrity, fairness and efficiency within the wealth management industry.

No one silver bullet will resolve things; instead, collaboration will be required across the industry:

• Regulator – providers and distributors seeking input and guidance; identify good (and bad) practice to underline requirements.
• Providers – platforms, DFMs and asset managers to continue to move forward with MiFID II enhancements and address problem solving; support distributors with changes and resolutions.
• Trade bodies and industry roundtables – trade bodies can continue to play a key role in the facilitation of standardisation discussions with a range of stakeholders; help to establish consistency and good practice.
• Technology – needed to create and facilitate required cost efficiencies; but systems/tools need to ‘talk to each other’ to resolve gaps and inconsistencies.

Matt Ward is communications director at AKG Financial Analytics

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