Complying with regulations and gaining commercial advantage are not always easy bed fellows. So if you are an adviser or wealth manager grappling with the upcoming implementation of the EU’s second Markets in Financial Instruments Directive (MiFID II) the first response may be to think of it as yet another drain on time and resources rather than as a potential boost to your bottom line.
Certainly, there is a lot in MiFID II for those providing investment services to think about, and the UK’s pending exit from the EU is not going to give anyone a get out of jail free card. Details in some areas are yet to be pinned down, but the FCA and Her Majesty’s Treasury are pressing on regardless and implementation begins from 3 January 2018. That’s less than five months from now.
Here’s an alternative view; that’s also less than five months for advisers and wealth managers to embrace MiFID II and see it for the potential commercial opportunity that it is.
A silver lining to this cloud?
I’m convinced that firms who can think of meeting MiFID II requirements as an effective jumping off point for strengthening their business, and not simply suffer it as an end game in itself, will emerge as winners.
One of the key objectives behind MiFID II is increasing client protection. Everything I hear from the many advisers and wealth managers we work with at IRESS suggests that your clients are seeking more than the bare essentials in this area. They’re seeking readily available and accurate real-time data about their investments. They increasingly expect proactive communication, delivered through their channel and device of choice, when events occur that impact on their portfolio value and so their ability to meet objectives.
It comes down to good relationships. Good, open and honest communication tends to be the defining feature of the strongest, longest-lasting and most productive relationships.
And that’s at the heart of the MiFID II opportunity.
MIFID II’s strengthened requirements around communication, disclosure and transparency for investors reflect underlying consumer trends. Embracing these positively and using technology to meet these needs are where you stand to benefit the most. Two examples that illustrate the potential are:
The 10% drop rule: When discretionary portfolios fall 10% or more in a reporting period, clients now must be informed of this.
Costs and charges: Clients now need to be given an aggregated view of all the costs and associated charges they will incur at point of execution and ongoing.
Why stop at 10%?
Looking at the 10% drop rule from an investor or client’s perspective, simply telling them about a drop might satisfy the basic requirement, but without context that may be counter-productive. So why wouldn’t you want to closely manage this interaction with your client? And should you stop at the discretionary part of their portfolio if, say, it only accounts for 20% of their wealth you advise on?
From there you quickly get to asking whether the only communication to a client should be the notification of a drop, without also regular updates on their financial affairs and investments. What if their portfolio went up 20% in the previous reporting period but then dropped by 10%? Wouldn’t you want to contextualise this? And how do you make sure there’s an ongoing link in your communication about portfolio performance to the client’s progress against their overall objectives?
A clear opportunity would be to use technology you already have available in your practice to push out regular real-time updates on portfolio value to your clients – alongside updates in person – providing context and building confidence in the investment strategy you have put in place for them.
Connecting the dots
Similar thought processes apply when it comes to costs and charges disclosure. With everything laid out in detail before the client, what is the potential link between their expected costs and charges and the value of your services? How do you best articulate that? How do you move fees and charges on from being a written compliance footnote to an open part of your conversation with your client?
Technology has a part to play here too. You will need to be easily able to access accurate and reliable costs and charges data on the investments you recommend, and to be able to pull this through into a well presented aggregated format that supports your client conversations and demonstrates the value you deliver.
Making compliance work for you
No matter how committed you already are to open, honest and transparent communication, thinking these types of issues through and using your response to them as an opportunity to improve your relationships, is exactly where your MiFID compliance project has the potential to boost your bottom line. But only if compliance is embraced as a starting point rather than the end game itself.
Our experience in the UK and other countries where IRESS operates has been that advisers and wealth managers who do see compliance as a catalyst to achieving broader goals around increased engagement and trust with clients, achieve greater return on their investment in regulatory response. Logically, that should be no surprise as trends driving the regulatory agenda tends to be linked to trends driving investor behaviour and technology too.
Good compliance can be good business, especially when combined with technology that helps you collate, access and push out the data and other information you need to communicate.