On 3 January 2018 entered into force in 31 states of the European Economic Area (the 28 EU members plus Iceland, Liechtenstein and Norway), MiFID II, update of the Markets in Financial Instruments Directive of 2004.
MiFID II was approved by the EU Parliament in 2014 and transposed by nation states in 2017 with the aim of strengthen the protection of savers through a better definition of the customer profile, greater clarity of the prospectuses showing the characteristics of the products and the complete transparency of the costs of the consultancy service and of the investment.
As we have already said, the adoption of MiFID II represents a revolution for financial advice. How will it be received by savers? How will the relationship between consultants and clients evolve?
With a view to total transparency, the legislation establishes that all the costs of the consultancy service and of the investment must be made explicit, both in absolute value (therefore in euros) and in percentage value. For this purpose, a disclosure must be sent to the customer former beforeand ex post.
In the disclosure former before, the financial advisor must also specify whether the advisory service provided is on an independent basis, and therefore paid on a fee basis, or on a non-independent basis, therefore paid through inducements, i.e. the commissions that the product-manufacturer (asset management company or insurance company) retrocedes to the intermediary (bank or stock brokerage company) on whose behalf the non-independent consultant carries out his activity.
Currently, the widespread perception on the costs of consultancy is not exactly consistent with reality: financial advisors are aware of the fact that not all end customers have understood well how the mechanism works, but they overestimate the degree of ease with which they master the matter .
At least, this is what emerges from the survey “MiFID II impact on the network industry”presented by McKinsey&Company during ConsulenTia 2018, the event organized in February in Rome by the National Association of Financial Advisors (ANASF).
Made 100 the price (pricing) current average of the networks, the survey shows that customers tributary the bottom 25% perceive it, believing it to be 75. Instead, financial advisors believe that client undervaluation is limited to -16% (84). Asset managers have a more realistic view, which corresponds to -22% (78). In practice, there is a figure of between 1 and 1,5 billion euros in revenues from the network system which today is not received by end customers.
If the advice is "non-independent", then the disclosure former before will have to detail the inducements, which according to MiFID II will be admitted and accepted only in the presence of an adequate added value guaranteed by the service (remuneration mechanisms that could push consultants to recommend some products rather than others more in line with customer needs are absolutely prohibited).
Not that costs weren't communicated before, but it wasn't clear how much cost what. And, above all, how much was due to the producer who had created the financial instrument and how much to the distributor who had placed it. A demonstration is offered by the survey presented in October 2017 by GFK Eurisko on behalf of Consob.
In practice, at least until the entry into force of MiFID II, customers did not know that 30% goes to the product factory and that 70% is relegated to the intermediary who places the product through the non-independent financial advisor.
Therefore, all this must be explained to customers. And the various items of service costs (example: subscription fees, transaction and custody costs, and so on) and product costs (management, brokerage and exit, performance fees, tax expenses, etc.) must be communicated in a clear, explicit and separate.
However, MiFID II, as we mentioned a few lines ago, distinguishes two phases in the transmission of this type of information to customers: former before, ie at the time of subscription of the investment, with the obligation to indicate, both as a percentage and in euros, at least the entry costs, the recurring costs and the exit costs, in addition to what the distributor receives from the product-factory; and ex post, to be sent annually to customers with details of the actual costs incurred during the year.
And here comes the interesting part. Because the first annual mailing with details of the costs actually incurred is expected for 2019 and non-independent financial advisors feel some concern in this regard, as reported by the McKinsey survey.
The study highlights how networks have already started working to prepare for the entry into force of MiFID II, both in-house and online. However, more than 50% of financial advisors do not feel "directed" by management to face the challenges posed by the introduction of legislation.
The authors of the survey therefore asked the following question to the consulted consultants: “Without substantial pricing changes, how many of your current customers will significantly reduce the assets entrusted to you?”. According to professionals, around 12 billion euros of network customers could change their consultant of reference after the introduction of MiFID II.
There is a remedy, according to McKinsey. If the networks were able to demonstrate to the customer the quality of the service offered, the growth of the masses entrusted to the consultancy of professionals would continue to grow at a rapid pace, more than offsetting a possible reduction in the average price.
In McKinsey's simulation, focusing on strengthening the brand by "educating" the customer on the quality of the service would increase the market share of fully operational networks by 13% to 41%, while limiting itself to strengthening the offer and service models on investments share would rise by only 8%, to 36%.
The suggestion is clear: quality, quality, quality.
Source: AdviseOnly
