Wednesday, 01 November 2017
Saul Djanogly on why MiFID II is good news for trustees of investment portfolios in UK and Europe

Saul Djanogly TEP is CEO and Founder of Best Interests Consultants, UK

As the saying goes, ''When a man with experience meets a man with money, the man with money gets the experience and the man with experience gets the money''. This continues to apply to the investment management industry and its clients. Caveat emptor is clearly not enough. Regulators worldwide are acutely conscious of this and are increasingly demanding higher standards of transparency and value for money for clients. In the UK, the industry is coming under twin pressures from the local regulator, the Financial Conduct Authority (FCA) and the European Commission. While dealing with the FCA’s highly critical report of UK investment managers, fund managers will have to implement stringent EU legislation from January 2018.

The Markets in Financial Instruments Directive II (MiFID II) is a key part of a package of EU laws aimed at creating a single, more competitive market in financial services across all EU Member States. Despite Brexit, the UK is enforcing the EU legislation in full. As a result, the UK and EU will operate financial services under the same rules and some hope that this will insulate it from a regulatory challenge to its primacy in financial services in Europe.

How will MiFID 2 help trustees of investment portfolios when it comes to acting in their clients’ best interests? As highlighted in the recent FCA report*.

Professional trustees, in common with retail clients, have suffered from a lack of transparency from their investment advisors around fees and charges and in particular, hidden fees. Trustees seem to be unaware that high fees and charges (due to their compounding effect) are one of the best predictors of future poor returns. Consequently, they have rarely tackled this issue head-on with their advisors.

MiFID II addresses this problem explicitly. From January 2018, clients will be entitled to receive an itemised breakdown both in percentage and monetary terms for all annual costs, including one-off charges, ongoing charges, all costs related to transactions, any charges related to ancillary services and incidental costs. This is an excellent first step which many conscientious trustees have already taken on their own initiative.

Cumulative costs

In addition, MiFID II insists that ''firms have to provide clients with an illustration to show the cumulative effect of the costs on the return''**. As can be seen from the below example, trustees will now be able to see in black and white, the pernicious effects of annually compounding charges on returns.

Conflicts of interest

There is another area in which MiFID II can be of great help to trustees. This is in making them aware of conflicts of interest that may arise as a result of an investment manager using their own in-house funds or products in the portfolio. As a result of MiFID II, firms will now be required to ensure and evidence that no such bias exists, both when the initial investment is made and on a continuing basis. Clients will be entitled to receive this evidence. If a firm routinely recommends its own products, this will suggest that it is deficient in the provision of advice on an independent basis***.

In conclusion, the enforcement of MIFID II presents trustees with a great opportunity to receive far higher levels of meaningful and jargon-free information from their investment advisors. Trustees who fail to ask for this highly relevant information from their investment advisors, to which they are legally entitled, may well be doing their clients a disservice.

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*FCA Asset Management Market Study Final Report June 2017.
**European Securities and Markets Authority- Q and A on MIFID II - 10 July 2017, ESMA35-43-349, Page 60.

***European Securities and Markets Authority- Q and A on MIFID 2-10 July 2017, ESMA35-43-349, Page 40.