MiFID II was launched in January 2018 – and while the regulatory regime appears to have been implemented smoothly – Private Banker International (PBI) has found the rules are particularly impacting private banks in three ways: client servicing, fee transparency and client reporting. Paul Golden reports
Thomas Hofmann, partner at strategy consultants Simon Kucher & Partners, highlights the impact MiFID II is having on client servicing and fee transparency and disclosure, in terms of higher costs to serve/higher time per client ratio and fewer services for non-target clients.
Go deeper with GlobalData
In a MiFID II world, clients have to sign up for an advisory or discretionary mandate when willing to talk to relationship managers.
Hofmann says: “Since the advisory solution offering has not been very sophisticated in the past, banks have had to work on their offering to match it with their client’s needs. This is not straightforward. The best-in-class banks have managed to shift their clients to a scenario of 15% pure execution-only, 55% advisory and 30% discretionary.”
Banks are now obliged to communicate the services provided to clients in a more systematic way, meaning clients are more likely to be aware of services that were already available, but relatively unknown due to lack of communication, he adds.
According to Hofmann, clients have started asking banks ‘difficult’ questions about what they have to pay. “Banks can only maintain the same level of profitability when they are able to defend their prices through communicating their value,” he continues.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataMargins to drop
“On average, margins are expected to decrease due to the fact that some banks and bankers do not have a well prepared pricing defence.”
Due to the administrative requirements of MiFID II (client classification, documentation, etc.) the time per client has also increased. Therefore, bankers either serve fewer clients when maintaining the same level of interaction as before, or have less ‘quality’ time per clients.
“In addition, clients that do not fulfil the minimum AuM requirement are having access to fewer services/options in a MiFID II world, whether in terms of access to investment products or the interaction model with the bank,” says Hofmann.
Shifting to a remuneration structure that separates the product from the advice, with a direct, billed charge for the pure-advice service, will continue to be difficult to get accustomed to, but firms will need to communicate with customers openly, says Aite Group senior analyst, Meghna Mukerjee.
These challenges are exacerbated by the fact that clients do not understand why it was necessary to change pricing and reporting structures according to Phil Deeks, technical director at regulatory consultancy, TCC.
He says: “The lack of engagement, information asymmetry and the relatively subtle customer-facing impact of MiFID II mean that unengaged end customers are not likely to recognise the need for change or in the short term to derive benefits from the changes.”
Mukerjee says enhanced adviser and client education/training has become a key differentiator. Along with the necessary reskilling of the front line, advisers need to feel engaged with the changes coming down the line and firms must ensure that advisers are on board with their approach and how that impacts their client dynamics.
The ultimate aim is that banks and wealth managers design and deliver information and documentation that better meets the information needs of their clients and the requirement to outline the total cost of ownership should increase understanding of the all-in costs of the investment solution.
“The total cost of ownership is likely to be one of the MiFID II obligations that is championed by the FCA as it directly applies to its competition objective,” adds Deeks.
Digital drive
An ABN Amro spokesperson suggests that the directive will accelerate the development of digital solutions as this will provide clients with simpler access to information. Technology will be very supportive in this process, she says. “The need for transparency will furthermore create more awareness regarding costs and fees and as such a natural demand for more low-costs solutions and products.”
Deeks explains that the increased transparency being driven by MiFID II –coupled with the remedies from the FCA’s asset management market study – should create a more competitive market and downward pressure on pricing. “Value for money is clearly a regulatory priority and will not abate in the short term,” he concludes.
Client reporting
PBI reported in early February 2018 that a Northern Trust survey found nearly half of investment managers and consultants consider client reporting as the greatest implementation challenge posed by MiFID II.
Transaction and transparency reporting was cited as the greatest challenge by around 20% of the respondents, and another 20% cited inducements and research.
According to nearly 15% of respondents, updating client documentation was the biggest hurdle around MiFID II.
Also, 65% of the respondents said they expect the new regulatory landscape to take an increasing amount of their time in 2018 as against the previous year.
UK online wealth manager, SCM Direct, which was founded by Gina and Alan Miller, released a dossier in early 2018 detailing how certain firms appear to be violating MiFID II cost and fee rules.
Fee transparency challenge
While MiFID II is designed to increase transparency, SCM argues that firms may not just be breaking the law, as prescribed by MiFID II, but may also be guilty of ‘False Representation’ regarding their disclosure of costs and fees of investing.
Key findings of the SCM Direct dossier on MiFID II included:
- Only 40% of firms disclosed their MiFID II cost closures on their websites.
- 60% of firms provided European MiFID II Template (EMT) information only when prompted by an email or through a third-party data provider.
- None of the robo-advisers disclosed the full aggregate costs and charges of their services on their websites.
- Some 90% of the robo-advisers had no overall estimate of their transaction costs on their websites.
- Only 30% of DIY firms showed all aggregated costs and charges (including transaction costs inside the funds) on their websites.
- Only 22% of traditional wealth managers showed their costs and charges before the account was opened.
