“It ain’t what you do it’s the way that you do it.”
The best songs have lyrics that are timeless, beautifully enigmatic, and can be interpreted any number of ways. Although to be fair, it’s extremely unlikely the combined brains of Fun Boy Three and Bananarama were thinking about the minutiae of financial regulation when performing their 1982 classic*.
However as we pass the anniversary of its release (29 January 1982, for those of us old enough to remember) the lyrics, which are now deeply embedded in your head for at least the next 12 hours, do seem strangely prophetic with regards to MiFID II, and the challenges advisers will face as 2018 progresses.
“You can try hard, don’t mean a thing” probably sums up the thoughts of many advisers as they waded through the hundreds of pages of MiFID II detail, and for most advice firms the change is more of an inconvenience as opposed to radical reform.
The reality of full disclosure for asset managers is creating much debate, but most advisers have been there/done that for a number of years. Even before the RDR came along, many advice firms were fully transparent with their fees. The RDR also raised the standards of advice and disclosure of advice charges to a level whereby the advice “industry” is now seen as a profession.
So for many advice firms, MiFID II is a short-term problem, a tweak of existing processes and a few new disclosure documents. Clients of these firms are used to their adviser talking about costs and the importance of cost control, so in terms of the adviser/client relationship and the advice proposition being delivered the changes are more cosmetic as opposed to transformational.
But while the nature of the advice doesn’t need to change, the way it’s delivered is where the problems might lie. As the year progresses, if internal processes aren’t as slick as they could be, the pain of MiFID II won’t be felt by advisers and their clients, but by the operational side and business owners as increased workload creates margin pressure. “It ain’t what you do, it’s the way that you do it”.
Your investment proposition is the key area to ensure you’ve got 100 per cent right post MiFID II. We carried out research with around 100 firms towards the middle of 2017 and found the vast majority have some sort of centralised investment proposition (CIP) in place. And when they do, 84 per cent of firms were placing 80 per cent or more of their flows into this proposition.
We define a CIP as any one or more of a number of solutions, ranging from multi-asset/multi-manager funds, to advisory model portfolios, to partnering with a discretionary fund manager (DFM), either via a model or bespoke mandate. Out of all of these, the in-house advisory model is the most popular, with 43 per cent of new business taking this route.
And this advisory model is the one that MiFID II arguably bites the hardest. The new requirements for personalised cost disclosure prior to any fund switch could mean the time and effort needed to handle a fund change or rebalance will become unrealistic for many firms. If you have, say, 100 clients linked to a model portfolio, how quickly and easily can you produce 100 personalised cost disclosures, send these to the clients, collect their responses and gain the authorisation to switch, and implement the change? Without a very slick process in place there is a danger this model becomes unworkable.
So, as well as ensuring compliance with MiFID II it is equally, if not more important to ensure the operational side is as efficient as possible. Without this care and attention there is a danger the new requirements increase the time it takes to deliver your advice process to the point that certain models become unprofitable and/or introduce risk as shortcuts are introduced.
To help with this we have recently produced a short paper, in conjunction with Tatton Investment Management, which looks at the impact of MiFID II on centralised investment propositions, however they are constructed. You can download a free copy here
* And yes, I know it was originally performed by Ella Fitzgerald, as far back as 1939. Check out Spotify if you need to. The greatest voice of all time.To download the Nucleus white paper MiFID II: A guide for financial advisers, prepared in partnership with Phil Young of Zero Support, click here