Mifid II has been in force for over two years and still we find there's a lot of debate as to how best approach periodic suitability assessments.
There are enough articles and blogs covering this topic in general, and we aren’t looking to rehash old territory.
However, we still see discussions on the best approach to cover certain aspects, one of the main ones being costs disclosure. So, this is what we'll focus on here.
Let's start with the two main things periodic suitability assessments require:
1) An assessment of suitability (obviously!). This means revisiting a client’s objectives, risk profile and the plan, and reconfirming if the plan remains suitable.
2) The costs a client has paid over the last 12 months (ex-post costs), and projected costs over the next 12 months (ex-ante costs).
These can be provided as a single document, or separately.
Two of the main arguments we hear are whether advisers can rely on the annual statements of ex-post costs issued by product providers, and whether to also include non-Mifid II business in this cost disclosure. We'll look at each of these in turn.
As providers are required to issue an annual statement of ex-post costs to the client, there's an argument that says this covers the requirement to disclose ex-post costs.
The argument goes that advisers can then just look at a suitability assessment and what the expected charges are over the next 12 months.
But there are several potential issues with this.
Firstly, the provider’s annual statement may not tie in with your own reviews.
This can be confusing for the client if they receive one set of figures from their provider and another from the adviser. It also creates extra work for office staff in obtaining more information outside of the review date of the product.
Secondly, it's important to keep things as simple and understandable to a client as possible.
A client may have multiple plans with various providers.
This means that receiving various annual cost disclosures, potentially set out in different formats and sent at different times, plus a suitability review (which again may be at a different time of year), can be very confusing.
Thirdly, providers are not perfect; we know mistakes can and do happen.
Comparing the ex-post costs against the actual fees you have received as the adviser, and the product charges you understand are being deducted, can help to flag up such errors.
None of us want to make our job more difficult than it needs to be, or spend time on the unnecessary.
But if an ongoing service is what a client is paying for, then it is fair for them to expect something which is understandable, concise and correct.
The disclosure of ex-post costs is only a requirement of Mifid II business.
Technically this means it isn't a requirement for certain financial instruments, such as insurance products and pensions.
The next debate then becomes: is it still worth getting ex-post costs on such plans if possible? Especially given that sometimes obtaining these costs is difficult, if not impossible (mentioning no names!).
We'd argue it is best practice to include these plans.
Where clients hold both Mifid II and non-Mifid II products, receiving different information about different plans just adds to the confusion. P
Giving ex-post costs on all plans provides clients with clarity across the board, and ensures you are being transparent.
None of us can predict the future, but the chances are if this legislation changes, it will tighten up rather than be watered down.
It's realistic to consider the disclosure of ex-post costs on non Mifid II business could become a requirement in the future.
If this turns out to be the case, having a robust process in place will put you ahead of the curve.
Some providers definitely agree with this sentiment, and already send out ex-post disclosures for these products.
If you are struggling with your periodic suitability assessments, or want to discuss this further, just get in touch.