Of the sprawling range of Mifid II requirements placed on financial services firms, incoming rules around ex-post disclosure could become one of the biggest compliance headaches and potential business risks for the fund management and intermediary market.
The new rules, which will compel IFAs and wealth managers to disclose actual costs and charges (rather than anticipated ones), will introduce greater transparency for investors – but place unprecedented scrutiny on the value these institutions deliver to end investors.
Failure to properly comply, or communicate the ex-post fees to investors effectively before April 2019 could lead to intermediaries losing valuable business and put the long-term viability of asset managers’ favourite distribution channels into question
The need to work together
While there has already been discussion around whether fund managers are doing enough to provide necessary support to their intermediary counterparts, both groups are mutually dependent and must work together to ensure the communication around fees, costs and charges is done in a consistent and transparent manner.
This is important not only to ensure regulatory compliance, but also to limit the possible backlash from the end client on greater visibility on costs and charges.
How investors react to these figures is critical. This is the first time retail investors will have such a detailed breakdown of transaction costs.
Financial advisers and wealth managers will need to be prepared to clearly explain and justify these figures to customers if they are going to negate disruptions to their processes and even re-evaluate their choice of asset managers.
This will prove particularly important if the actual costs and charges incurred exceed the predicted figure, otherwise known as ex-ante.
At a time when technology continues to bring into question the value of some financial intermediaries or broking roles, wealth managers and IFAs must be prepared for end investors to ask difficult questions.
For instance, these institutions will need to explain the breakdown in costs and why they have chosen certain asset managers in their investment portfolios. And rather than showing these items to retail clients in abstract methods such as basis points, this will now be displayed as a pound or euro amount, making it much easier for an investor to see how this hits their pocket.
But the challenge goes beyond one of effective communication.
The volume of data created since January 3 2018 that must soon be reported as ex-post is staggering.
Moreover, the complexity around consolidating this data for the end client is unprecedented for the sector. Portfolio allocations, top-up changes and policy amends all add to the complexity – making it critical for asset managers and intermediaries to take a proactive stance and not leave compliance until the eleventh hour.
Mind the data gap
Another issue with compliance is around data gaps – specifically in European Mifid templates used to communicate fundamental fund information and fees.
In order to tackle this issue, the industry is exploring ways to use estimates and other relevant information to plug the gaps, but the success of this method is undetermined.