Advisers should be getting in touch with nervous investors at a portfolio drop as small as 6 per cent and not wait until the drop has reached the 10 per cent mark required under Mifid regulation, a behavioural bias specialist has said.
The 10 per cent rule, introduced under Mifid II in January 2018, is an obligation on advisers to inform a client, before the end of that business day, if their portfolio has dropped by 10 per cent or more compared to its valuation at the beginning of the quarterly reporting period.
Concerns have previously been raised that notifying clients under the rule could cause knee-jerk reactions amongst investors, but Alex Chase, head of product at behavioural finance firm Oxford Risk, urged advisers to consider action before 10 per cent in some cases.
Speaking at the The Paraplanner Conference hosted by the Chartered Institute for Securities & Investment in Stratford-Upon-Avon today (June 18), Mr Chase said he would not advise getting in touch with nervous clients "out of the blue" and urging them not to panic.
Mr Chase said: "How do we deliver bad news to somebody? We can’t just put it in a snazzy infographic and hope for the best and the one bit of bad news we should all be thinking about is the bit we are now required to give to clients if their portfolio drops more than 10 per cent.
"If you know that someone has low composure, has low confidence and is more likely to be worried about that kind of message, you should be getting in touch with them at 6 per cent, 7 per cent, 8 per cent, wherever it goes.
"That way you can say ‘hey listen your portfolio has dipped, in a couple of weeks it might keep dipping and I’m going to have to write you a letter to say don’t panic, and I really do mean it because we’re committed to this in the long term'."
On the other end of the spectrum, Mr Chase added, some clients will not be phased by a 10 per cent drop and a short letter under Mifid II will suffice.
Mr Chase said it was "never irrational" to buy "emotional comfort" along with investments, and urged advisers to consider opportunities to tailor communication with investors to "give the right message at the right time".
He added: "So if you know someone has relatively low financial knowledge, and relatively low confidence, then you can give the same message to someone who has high knowledge, and high confidence, in a way that’s going to make them more comfortable."
The 10 per cent rule also applies to platforms holding assets in discretionary managed portfolios, which have a duty to alert discretionary fund managers or advisers, or indeed their clients.
When the requirement was introduced concerns were raised as to unintended consequences stemming from the reporting rule, with Rory Percival, former technical specialist at the Financial Conduct Authority, warning investors might "panic and bail out and crystallise a loss" upon learning of a drop in their portfolio.
Speaking to FTAdviser last year Mr Percival said: "Anybody who doesn’t have to report it I don’t think should do. I don’t think it’s right and I also think the FCA has quite significant reservations about the effectiveness of the measure in general."
Last month FTAdviser reported the 10 per cent drop rule was discouraging some advisers from using multiple platforms, as they found themselves looking at the assets held on all platforms and manually calculating the overall drop.
rachel.addison@ft.com
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