MiFID II looms over UK’s Retail Distribution Review
The UK is pushing ahead with its Retail Distribution Review to obtain greater clarity on how investment products are sold to retail investors, to set a clear line between commission-driven sales and independent advice, and generally to raise the professional standards of the UK’s independent financial advisers.
The reforms are due to be implemented by 31 December 2012 and will entail extensive product corporate and advisory restructuring for the industry, with all the associated costs.
Critics maintain it is politically driven, that it dismantles a largely effective system and that by 2013 it will knock out up to a third of all the UK’s 16,000 financial advisers, who will not meet training, service or capital adequacy requirements.
How this reform sits with the upcoming MiFID II rules remains to be seen.
Draft proposals for the EU legislation, which in the financial sector has primacy over all national legislation, are due out this autumn.
One reason for the UK to pre-empt EU legislation is that it is an opportunity to lead the reform agenda in Europe, though critics say that the UK has delayed too long to make this an effective policy.
MiFID risk to UK reform
The UK policy of pushing ahead with its own reforms could prove to be an expensive mistake if MiFID II adopts a different policy line.
But the UK is not alone in wanting to pre-empt MiFID II. Dutch rules banning commission on advisory and execution-only business are due to be implemented in January 2013.
In Germany, the industry is making its own moves to reduce its reliance on commission-based advice.
RDR is not popular in the UK. A near-unanimous 98% of financial advisers, according to one poll, oppose the reform package, saying it discriminates against small advisory firms, to the benefit of large distribution networks and platforms, mostly run by major banks.
The tussle is being watched closely by regulatory authorities in Europe and elsewhere, since it targets the overall result many want to achieve: greater individual provision via private investments and savings for retirement, along with better transparency of the entire financial advisory process.
A key question for advisers is how to deal with clients’ investment portfolios. Independent financial research firm Defaqto has found that outsourcing to a discretionary manager is growing.
A survey of 232 advisers using platforms indicated 51% are already outsourcing some or all of their investment process. Within this, 26% are outsourcing to a discretionary manager, more than the 23% using multi-managers.
Fraser Donaldson, Defaqto’s Insight Analyst for Funds, said:
“An adviser’s decision to outsource investment management, although generally a strategic business decision, must ultimately be for the benefit of the client.”
But outsourcing is effectively entering into a long-term business relationship, with all the due diligence that requires.
Research by Iveagh Private Investment House, which offers funds to retail clients as well as running the family office for the Guinness family, indicates 40% of IFAs will change their business model, become more qualified and manage portfolio risk in-house; 30% will align with platforms and another 30% will link up with independent fund managers who can offer risk profiling and risk-rated funds.
Ben Phillips, partner at management consultants Casey Quirk, recommends new support for sales professionals, particularly more technical personnel such as consultant relations officers and portfolio specialists who can appeal to professional buyers.
Further versions of MiFID are likely to target fund commissions, forcing distributors to justify how they select third-party products, he notes.
Radical overhaul for ifa firms
Jens Baumgarten (pictured) of Simon-Kucher & Partners expects managers to become more targeted in who they work with, both within distribution channels and between them, selecting those offering best value, associated services and/or stable long term returns.
“When everything was based on ‘kickbacks’, you were trying to serve your needs as a distribution partner, but what you were actually doing was buying market share by paying high commissions,” he notes.
“Now, you have to differentiate yourself to distribution partners through superior services.”
Advice-based charges, rather than fee by product type, are already common for top-end retail distributors.
The model could migrate towards mass retail, says Baumgarten, and a distributor’s main customer will become the investor, not asset manager.