There's a deadline coming up - the 3rd January 2018 - and whilst the whole world doesn't change overnight, the nature of this latest tranche of gold-plated EU regulations does have significant impacts on our clients, and on ourselves. At ValidPath, we've devoted weeks, if not months of our lives chewing on the ambiguities at the heart of COBS 9A in order to shed as much light on the issue as we can for the benefit of our Members. The point of this blogpost is not to repeat what we have already covered, in quite some depth, on our website. The point is to think a little about the impact upon ourselves and our clients, so here are three core themes to reflect on...
(1) Periodic Reporting
Not to be confused with 'periodic assessment', this term refers to the standardised, regular valuation-type reports, usually issued by product-providers and DFMs. Previously, these were generated every six months, but MiFID II ups the frequency to quarterly, and includes a new requirement for notifications if an investment value drops by 10% or more. For IFAs, this change doesn't bring with it any major logistical implications, other than the obvious one that your clients, whether they like the idea or not, will be receiving information twice as frequently as before. Some, of course will welcome such a development. Given, however, the fact that most of us are utterly swamped with information, spewing violently out of our broadband sockets, I strongly suspect that this kind of change is unlikely to be entirely beneficial. When people are forced to receive more information that they did not specifically require or request, it simply functions as a kind of white noise, obscuring other matters which may be of greater strategic import. Many customers will find the increased frequency of reporting a source of elevated stress, and Mrs Miggins, at the age of 89 will learn a new kind of short-termist anxiety in relation to her £37,000 Axa Distribution Bond which she inherited from her deceased husband. Increasingly, at client reviews, my time is occupied in helping interpret for them the vast quantities of paperwork they have accumulated over the previous six months, which have been quietly composting in some corner, pending my arrival.
Changes within our marketplace are no doubt necessary, but this one is not going to be received with universal joy by every client on your books. It is therefore important to take a little time out (perhaps over Christmas?) to consider how this might impact upon your clients. Who might welcome it? Who might not? How might you help both classes of customer to make the best of things? How might you actually piggy-back your own business development, on the back of MiFID II in order to position your own service, so that it contrasts positively against the offerings from other firms in your area?
(2) Periodic Assessments
Now, this is an aspect which does have a direct impact upon intermediaries. The rule in COBS 9A is that if you offer a client a 'periodic assessment' (ie. an ongoing review service) then the minimum frequency is once a year. For a great many clients, this is unlikely to present you with any challenges, but for Mrs Miggins (above) there is an unhelpful implication: given the scale of her provisions, she may not need an annual review, and she very likely cannot afford one. It seems improbable that the bureaucrats have even considered this possible downside, believing as they do in the utopian nature of the european regulatory project. No doubt, if Mrs Miggins does not find her heart strangely warmed by the prospect of paying more for an additional service that she did not ask for, she will be regarded by those ivory-tower enthusiasts as singularly ungrateful in her response to such regulatory largesse.
But Mrs Miggins remains your client. Unless you have a heart of flint, you'll care about her and her circumstances, and you'll want to do the best you can do for her. So what can you do? Firstly, recognise that we've been here before: whole swathes of consumers found themselves priced out of the financial advice marketplace due to RDR. No doubt those unwelcome cost-consequences were far from intended by the FCA, but on the ground that was the effect. In practice, whilst the banks were swift to ditch those lower-net-worth customers, I suspect that it was the IFA sector which picked up the tab, which meant that some thought needed to go into the service model, if the advisory firms were to stay on the right side of the line labeled 'uneconomic'. Some IFAs may respond to these changes by becoming yet more elitist when it comes to recruiting and retaining clients, but others may take a long hard look at their proposition, and move towards one that is more cost-effective, centrally-managed, and simpler for the client. Perhaps you have no Mrs Miggins's amongst your clientele - but either way, it makes sense to think carefully about your ongoing service proposition: how do you organise it, deliver it? What are your chosen platform-providers doing to support you? How can you avoid reinventing wheels? How do you document the client's response to your review process, especially if he/she doesn't wish to participate? How will you efficiently document the continuing suitability of legacy arrangements where no changes are needed?
There's quite a bit in COBS 9A about the suitability of our advice, and the steps the Adviser must take in order to ensure high standards. One part of this involves a careful assessment of the client's own experience with, and ownership of, invesment products. You'd have thought that this would be entirely essential (and, indeed, our own practice-management system, Clarity, allows the Adviser log all the details of a client's legacy products, by FCA category), but we do still encounter Advisers which exhibit a penchant for minimalism in this area. A risk profile isn't something that gets completed, another tick in a box, simply in order to 'compliancify' a piece of new business - it does need to adequately take into consideration the client's existing exposure to various asset classes. Otherwise, how would one accurately assess the risk implications of a new investment? If ValidPath Members are focusing on engineering the best kinds of financial outcomes for their clients, then the tools we use to assist us when risk-assessing, must be sufficiently robust. Provenance is important, which is why our CIP is based upon an Edgecumbe-accredited risk-profiler, and why our research system uses DeFaqto's risk-profiler to map through to an appropriate asset allocation model, without prematurely forcing the adviser to select a product-provider.
So MiFID II also therefore has implications for your due-diligence process, and we think supplies IFA firms with a great opportunity to differentiate themselves against the less credible competition out there, as well as communicate to clients a robust and intuitive way of defining investment solutions.