Collaboration is critical as Mifid II deadline nears

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.

The volume of data created since January 3 2018 that must soon be reported as ex-post is staggering.

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.

However, what is certain is the highly complex nature of calculations that must be completed to accurately report on a range of costs and charges, including:

• One-off charges such as deposit and termination fees.
• Ongoing fees such as management, advisory and custodian fees.
• Transaction costs, including broker commission, exchange fees and FX costs.
• Ancillary costs, like research.
• Performance-related fees.

Much is still to be done here to deliver consolidated and personalised statements for the end client. 

Beware the transition period

There has already been some doubt over the industry’s readiness to meet the April 2019 deadline for retail clients.

There is still concern that the industry, in particular fund managers, have not allocated enough time to ensure intermediaries are equipped with enough data to provide comprehensive ex-post data in 2019.

In order to ensure that intermediaries and asset managers alike are not grappling to meet the deadline, the industry needs to start collaborating and act now, otherwise they may fail to remain compliant under Mifid II ex-post rules and risk losing clients in what is certain to become a more cost-sensitive investment environment.

Andrew Johnston is a director at FundAssist, a Broadridge company