New legislation introduced in 2018 through to 2019 has put greater onus on Wealth Managers and Stock Brokers to both provide a service and to ensure their products are suitable for their clients. These new rules, known as MiFID II are above and beyond that which had previously existed.

Much of this legislation was good practice for Independent Financial Advisers, and whilst there will still be gaps in recommendations provided by the (commonly “restricted”) services provided by Stock Brokers, Wealth Managers and Discretionary Fund Managers these rules will see an improvement to both the services provided, and transparency with respect to how they provide them.

This blog is a brief primer on things that have changed and why they have made a difference.

Aggregated information on costs and charges

This is probably the biggest change for many Stock Broker, Wealth Manager and Discretionary Fund Managers. Historically, I have found it hard to establish to find a realistic assessment of of costs. This a topic on which I have already written on this blog as to what these costs would be made up of by historically clients would have only been told an implicit annual fee for services with firms neglecting to mention transaction costs, fund management costs and where relevant platform costs. This view is supported by independent research.

For many individuals this new transparency (under MiFID II) will lead to an apparent significant increase in what is being charged, but the reality is these costs have always been there, it is just transparency that as improved (and it is our view there is still some room for this to improve further).

A ban on non-monetary benefits

Historically firms may have benefited from “non-monetary benefits” (for example, the supply of research information), and the FCA (our Regulator) has narrowed the available non-monetary benefits which these firms can enjoy.

As a firm Wingate have a strong ethos of “best of breed” when it comes to research and analysis tools. This means part of our explicit costs to clients will cover that we pay for these services rather than recoup them (in an opaque way) from our clients.

On-going services

Where on-going services are provided to clients it is now required to conduct an assessment of suitability at least annually. There are some Discretionary Fund Managers who may have little or no contact with individuals from year to year other than sending a detailed (and complex) valuation report. This will no longer be permitted.

In addition, where investments are being switched rules were introduced to ensure that existing and recommended investments are analysed side by side on a “cost/benefit” basis.

That firms manage to make a recommendation without considering clients previous arrangements is puzzling to me! Clearly there is a concern that recommendations are being made without considering a client’s best interest, hence the need to introduce these additional rules.

Defining “independence”

Potentially one of the few disadvantages of MiFID II is the definition of “independence” has weakened.

Prior to MiFID II to be independent a firm needed to act for their clients and make recommendations across the whole of the market and all market areas however MiFID II means a firm can call themselves independent even if they only recommend a “sufficient” range of relevant products from the market.

Additionally the concept of “focused independent advice” was introduced but our view is that truly independent financial advice still represents the Gold Standard and those offering less than this and those particularly offering a restricted service which covers many of the firms who call themselves Stock Brokers, or going to Discretionary Fund Managers is inferior as ultimately firms are incentivised to recommend their own products.

Requirement to report losses

One of the obligations imposed under MiFID II, with which I am not wholly in agreement, is the requirement to inform a client where the overall value of their value depreciates by 10%, and thereafter in multiples of 10%.

The reason I query the wisdom of this change, is that part of good financial planning and investment advice is to discuss with individuals the likely performance of their investment in good and bad markets (and again this was a requirement introduced by MiFID II but has always been good practice, in my opinion). This should mean an individual who is experiences a (temporary) fall should both see this as non-surprising and be less likely to react at potentially the worse possible time.

This change runs the risk of encouraging the wrong sort of behaviours, which Financial Advisers are often working hard to avoid.

Miscellaneous

Stockbrokers/Wealth Managers/Discretionary Fund Managers typically only provide investment management services, and not the full range of financial and tax planning services. We believe this is integral to a robust plan, particularly as retirement approaches, and are aligned with other investment management services.

We frequently find that compared with the firms detailed in this blog we charge less and do more and we would be delighted to discuss this with you, as well as help understand how the above changes are likely to impact on you.

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