Square one

The wealth management industry is now almost two years on from the introduction of Mifid II - but the regulation’s myriad consequences are only just beginning to play out for the sector. At the same time, amendments to the original rules are now coming over the horizon - and the laboured implementation of those changes is starting to look all-too-familiar.

As wealth firms continue to adapt to a world governed by labyrinthine Mifid requirements, their attention has turned to the European Commission’s sustainable finance proposals. These amendments will require all advisers to consider ESG issues as part of their suitability assessments. And investment managers will have to report on how sustainability risks are likely to affect client returns. 

An important plank of the proposals is a taxonomy that aims to limit “greenwashing” practices by setting out what constitutes a sustainable practice and, in turn, a sustainable investment. Importantly, the FCA has said it will implement these rules, due to come in late next year, regardless of what happens with Brexit.

This time around, DFMs’ own thinking is already in line with the spirit of the changes. The past 18 months alone have seen a sea-change in the way that wealth firms deal with ESG. But there’s a difference between agreeing something in principle and codifying the actions that must be taken. And this is the heart of the problem for lawmakers, too. 

In an echo of an issue that reared its head in the run-up to Mifid II implementation, there are growing concerns that disclosure requirements will become applicable before the supporting measures that clarify exactly what these requirements involve have been approved.

For wealth managers tasked with the need to pass on new information to end-investors, another familiar quandary is how to extract this data from product providers who are unwilling or unable to play ball.

However well-intentioned the new rules may be, issues like these all point to a repeat of the pre-Mifid II pattern: an implementation delay, followed by a panicked rush to meet the new deadline later on.

Small world

What would an age of ‘deglobalisation’ mean for asset allocation practices? In theory, the answer is relatively straightforward, according to Capital Economics. 

If the world is shifting to an era of increased protectionism and decreased financial integration, this shift is likely to put “downwards pressure on returns across the board”, the forecaster notes.

In a ‘benign’ scenario, where the peak in globalisation comes about from tech advances lessening the importance of cross-border links, Capital thinks the world will look pretty similar to today: low growth, low inflation. 

In a more disorderly scenario, where protectionism starts reversing many of the changes seen over recent decades, a shift to safe havens would accelerate. In both cases, bonds would be a relative beneficiary.

But there are a couple of points in its research that are more surprising. The first is that emerging market equities may not do as badly as some assume. EM output growth may fall, but Capital suggests advanced economies’ profit share could fall during a period of deglobalisation - if they are less able to shift production across the world, for instance. 

The second is that diversification may become easier, not harder. The analysts note that “somewhat ironically, the diversification benefit from investing overseas has diminished in the globalisation era”. But with a rising tide no longer lifting all boats, more dispersion might be the order of the day for both equity and bond markets. That may be scant consolation in a world of lower returns overall, but it’s something to ponder for allocators nonetheless.

Fast and loose

Mario Draghi may have ended his time at the top of the European Central Bank, but monetary policy is still in the spotlight this week: DFMs will be keeping close tabs on decisions in both the US and Japan. Easing activity is on the cards in both countries, but as ever it’s longer-term plans that are interesting wealth managers. 

The expectation is that the US will take a lengthy breather after its third cut in as many meetings. The hope is that those plans, if hinted at by the Fed, will fare better than they did when last floated in July.

In Japan, expectations for further easing have been scaled back in the absence of any significant economic deterioration over the summer. So a decisive move by the Bank of Japan may worry investors as much as it reassures them. Investors have got used to reading the central banking runes over the past decade; this week may prove a reminder that monetary policy continues to play an outsize role in investment returns.