We should all now be comfortable with the requirement for portfolio declines of 10 per cent or more, over a quarterly reporting period, to be communicated to clients.
However, confusion initially occurred around what constitutes a portfolio and who has the reporting responsibility.
At Defaqto we had conversations, in the early days, with discretionary fund managers (DFMs) and platform providers who declared that Mifid II would have no impact upon them.
But over the last two years, I think most protagonists have come up to speed in supporting advisers with the regulatory requirements.
From a platform perspective, it may have been true that there was no actual regulatory requirement for them to report DFM managed portfolio falls.
But because they sit in between the DFM’s and the clients, they were, and are, the only ones who have the capability to effectively and efficiently produce the required reporting.
This occurs because trades between themselves and DFM’s, operating model portfolios, trade using ‘omnibus’ accounts, which means all the client trades, be those sales or purchases, for a period (normally one day) are combined.
So a DFM could see one trade of say £1m, but that could be made up of 50 client transactions, none of which would be associated with specific clients.
This means the DFM couldn’t have sight of individual client portfolios and therefore identify individual portfolio declines of 10 per cent or more.
An adviser using a platform could indeed identify the clients with relevant portfolio falls, but that’s assuming they can establish suitable alerts within the platform to do this.
The best option was clearly for the platforms themselves to provide this service and the majority now do this.
There was also some initial concern related to ‘advised’ portfolios and that the 10 per cent rule would also apply to those.
However, I think the industry is now clear that these are simply seen as a selection of funds recommended by an adviser and held by a client.
These may be described as portfolios, but because there is no discretionary management, they are not caught by the requirement.
Cost transparency
Increased transparency of costs was the other big area for advisers and Mifid II has felt strange from a regulatory perspective, in that the majority of advisers did not comply from day one and many still do not.
It’s also true to say that many providers, such as fund managers, were also slow to comply, which had the knock-on effect of making it impossible for advisers to communicate the required costs to their clients.
Defaqto was up and running from the beginning, providing the required fees through its adviser software.
