It is a natural human desire to be “different” and be recognised for one’s own achievements. Whilst some hate to be compared, most salespeople love the idea of being the best. The desire to achieve this can be all consuming.
It is exactly these traits that make investment management such a smorgasbord of options, linked to literally 10s of thousands of different shares and funds. It is these options that lead to wildly different outcomes for clients and, like any good golfer, the salesperson only remembers the good shots!
If we set aside IDD only advisers, as they only have insured funds and limited investments available, the move in the EU is towards firms with MiFID, or advisers who have access to MiFID firms.
This is where the human desire to be independent and different comes up against a range of rules that are designed to ensure that a client gets a consistent process and outcome determined by risk and strategy. Not only that, they get full disclosure of costs, projections and analysis of individual shares, ETF, commodities or funds.
Notwithstanding that 10,000 salespeople are likely to come up with 10,000 solutions for one client, it’s likely that the time taken to do that would be 20,000 hours. If a business wants to be successful it cannot have time wasted where, for example, 5 advisers with 5 clients each end up with 25 solutions (50 hours) that then has to be monitored, recorded, compliance checked, audited and managed.
A typical adviser firm of 3 advisers and 4 other staff may want a MiFID licence. But, because MiFID requires separation of Compliance and Risk, it requires separation of internal and external audit and separation from advisers and an overall supervisor or board. The result is that many firms don’t take MiFID with all its costs and burdens and, instead, remain IDD licenced.
However, an IDD firm cannot make the claim to be portfolio managers or investment managers. Unfortunately, many do and the regulators are looking to go after them as there is a notable push in some countries against IDD agents, whether they can even call themselves independent or not (Spain for example).
So, what is the solution?
Outsourcing at reduced cost and exposure is the most obvious. Some IDD agents are seeking the services of Discretionary Fund Managers (DFMs) but there are signs of a clampdown here as well, as the IDD should have investment licences (unlikely) in order to promote DFMs that are not EU based. Further “reverse-solicitation” of non-EU based institutions is being increasingly questioned. EU DFMs can co-operate with IDD agents as an EU base allows direct access to retail clients (whereas non-EU does not unless reverse solicitation is applied. However, if 50 clients of an IDD agent all have the same non-EU DFM then it is tough to argue reverse solicitation has happened!)
The alternative to an EU DFM is clearly an EU based MiFID network that holds DFM status that also allows advisers to operate independently. Perhaps the ultimate goal is to have efficient compliance RegTech and investment governance in place that does all the heavy lifting for the adviser.
There is a catch, if advisers want to be taken seriously and truly operate as investment managers. They must have the ethics to know that they need to be recognised with relevant investment exams.
One of the big issues that our own network had to confront was the insistence that all our registered agents had up to date recognised investment qualifications. For this reason, for every agent who joins us, three others go elsewhere. Would we lower our standards to allow for salespeople who don’t have the qualifications? We simply do not need to as we head towards 50 agents, and we are now attracting UK and US advisers who want to work in the EU.
So, what is the future of investment management and outsourcing?
Well, the fact that you have the “big” players from the UK starting to setup offices in the EU and offer their services through EU based agents really indicates where the market will be in 5-10 years. For those IDD agents who think that they can continue to operate with limited investment qualifications, advise on UK or Maltese pensions, manage Insurance Bonds (which are also coming under legal scrutiny and are subject to some large legal cases in some areas) then the message should be writ large. You either seek to recognise your own great qualities by obtaining that recognition through examination, or you will rapidly go the way of the UK 1990s advisers. There were around 185,000 registered advisers in the UK in the mid-1990s when qualifications and regulation was light (where much of the EU was about 2 years ago) and that became around 40,000 within 10 years and dropped as low as 22,000 about 10 years ago.
Outsourcing allows 5 key benefits for qualified advisers to operate in efficient ways, leaving the tough compliance to a centralised system of experts, reducing costs, reducing time spent and enabling solutions for clients that simply do not exist without MiFID licences and qualifications.
Written by James Pearcy-Caldwell, Director of the award-winning software company known as Trove that operates within the OpesFidelio network of advisers.