There is a huge amount of regulation landing over the next six months in Europe: all of the directives and regulations are aiming to improve the outcome for customers, ensuring they have transparency, and receive clear information. Both providers and advisers need to navigate through and prepare for the changes ahead.
PRIIPs, for example, comes into effect on 1 January 2018. This creates the need for Key Information Documents (KID), a new disclosure document that clearly explains what the client is buying and how much it costs.
Then there is MiFID II, which means that if you are an investment adviser, you can no longer take commission. There is also the Insurance Distribution Directive, which sets out requirements for direct and bank sales of insurance products. Again, the aim is to protect the consumer, and the new rules are due to come in force in February 2018.
What are the key challenges presented for advisers?
Some aspects of the forthcoming regulatory changes are still unclear and this has also been a challenge. Under PRIIPs, for example, the requirement to provide fund information in a discretionary fund managed arrangement remains unclear, though it is generally understood that there is no obligation on a discretionary fund manager or adviser to provide a fund KID or KIID in such circumstances. It is also unclear how each country will apply the rules. Some may be far stricter in their interpretation, for example, whereas others may simply implement them in line with the EU standards.
Equally, the level of work for advisers will vary with different jurisdictions. In Holland, for example, they have already banned commissions on insurance products. In the UK, there has already been the Retail Distribution Review. Advisers in these jurisdictions will be one step ahead.
Political uncertainty is also a challenge. Brexit will have an impact. At the same time, the stock market is at an all-time high with many expecting some sort of correction. There has also been an increase in interest rates. If there is a correction in markets, this will create a more difficult backdrop to implement regulatory change.
How are advisers reviewing and changing their offering to adapt?
Above all, the legislation has required a change in mind set for adviser firms. Firms need to move away from higher upfront commissions and focus on securing a recurring income stream. Then, they need to match that to client needs. Lots more people are now focusing on trail commissions. Reaching the right balance between ongoing and upfront – from both the adviser and the client’s point of view – is a challenge.
The more prepared firms will already have addressed the issues presented by the new rules. They will have clear answers to explain what clients are paying for, and how they are positioning themselves. They will have answers when clients say ‘but this guy down the road is doing it cheaper’ and will be able to articulate the value they provide.
They have segmented their clients and know those of most value to them. They may have dropped lower-value clients, or put a new approach to services in place, such as using multi-asset funds. They will have looked at what a robust and repeatable investment process means in practice; they will have examined their business in light of the new rules, deciding what they need and don’t need in order to be as efficient as possible.
What good and bad practice have you seen?
Bad practice has dropped off considerably, for example in the area of investment advice.
At the other end, we are seeing clear moves for advisers to reduce upfront commission and focus more on trail. They recognise that they have value in their business if they are providing ongoing services and making it clear to clients what they will receive for that, be it a visit every quarter, or regular reviews.
Has outsourcing been part of the solution for advisers?
Yes, in many cases we see investors focusing on financial planning, and outsourcing everything else. Everyone has their own process for choosing an outsourcing partner, but many have now established a series of trusted relationships. They may use a range of providers – different providers for aggressive or conservative portfolios, for example.
We have seen strong support for our managed risk-targeted Compass range. These funds are designed to match the risk profile of the client. If that risk profile changes, the investor can switch, with limited risk, between funds. For clients who may want their assets managed in a bespoke way, we see increasing use of discretionary fund management through Quilter Cheviot.
The multi-asset Compass range is designed to provide international investors with exposure to professionally managed, risk-targeted, investment portfolios. The portfolios leverage the complementary skills of Old Mutual Global Investors (OMGI), in portfolio management, and Quilter Cheviot, in fund research – as well as pooling both businesses’ expertise in stock picking. This helps ensure the portfolios benefit from the best investment opportunities available globally, including funds, direct equities and bonds, investment trusts, and alternative investments.