27 November 2017
73% of respondents to our survey felt that they didn’t have enough clarity on MiFID II. The industry realises how much it will change things. How do we balance that with the optimism we discussed earlier?
There’s a feeling that MiFID II only applies to investment managers or discretionary managers. The advisers I speak to really struggle to understand why is it relevant to their business. Many are still coming to grips with how platform technologies can support them, for example putting portfolios on platforms. Every time we put an article out there about models on platforms and MiFID II, they are the top read pieces, so clearly there are challenges there for many people.
One of the things that is going to become necessary for discretionary managers is that if there is a 10% drop [in portfolios] within the reporting period, a client will have to be notified within 24 hours. That doesn’t happen often – it’s happened four times since the war. But it does happen. Therefore you have to put systems in place to ensure these clients can be informed within 24 hours and it’s an enormous job. The difficulty is that as firms gain more clients, they are outsourcing to discretionary fund managers who are running portfolios on platforms and they have no access to client data.
We’ve had a number of discussions with discretionary fund managers and there still seems to be a lack of clarity as to who is responsible for informing clients. Our view is that it’s the discretionary managers.
Yes. But they’re not going to know how to do it. One of the benefits of advisers using model portfolios is that there’s no concern about discretionary fund managers approaching their clients. They don’t know who the client is. But then that does mean that we have to become responsible for reporting on the 10% drop.
The intermediaries are, of course, at the sharp end of all this. Who wants to start on regulation?
There has been a lack of clarity around regulation for a long time. Only really now are a lot of things coming into some sort of sharp focus. The whole regulatory piece, the pressure on cost: there’s a lot of discussion around it. I’m old enough to remember what happened in 1995 when full disclosure came in. Some people got their act together and some didn’t. Those who did are still here and those that didn’t aren’t. I think we face lots of challenges. We have to do a lot of reading, take a lot of comment, take in what is happening at the moment and deal with it as best we can.
In terms of the time, money and resources required to implement regulation, it seems to go up and up and I sometimes wonder, what are the benefits for clients?
You’ve read my mind. Paul mentioned four occasions since the war when we’ve had this 10% drop [in portfolios]. So what is the cost of putting those systems in place? Secondly, it’s not saving the client from anything if the drop has already happened. So if you can put something in place to help the client not have that 10% drop, then that’s money well spent. But what’s the point in just informing the client that they are 10% down? As advisers, we monitor portfolios to ensure that they are working within the parameters that they have set up. So we have to be respectful of the regulator, while asking how much it is costing and how much it benefits the client. If my fees went up to stop clients getting scammed, I’d pay more money quite happily.
And it might cause them to panic. If you have to phone them up or email them to tell them: “Your portfolio has dropped by 10%”, that’s just going to make them panic. Equity is a long-term investment.
We do a lot of work with clients at the outset to try to set their expectations. We have to work out the client’s capacity for losses. We try to set a level for them – we say: “If it [portfolios] does fall by 20%, please come and talk to us. Below that, don’t worry, we know what’s going on.” The other thing is regulation education. We are now expected to do a lot more due diligence on everybody, for example around data protection. Not only are we very mindful of our clients data security and encrypted emails, but now we have to check that all our partners have the same level of due diligence around security. And I think in terms of MiFID II, the firms we interact with are as compliant as they can be. But there probably are some boutique firms out there that are going to struggle.
Regulation is there as a constant. For a small business, it takes you away from doing the day job. There’s going to be a continued trend of smaller businesses joining larger businesses so that they can exist within the framework. That will affect the industry going forward.
Research data is from an online survey of 34 respondents, which was conducted in partnership with Discus in August 2017.