Expert: Haney Saadah, EY 
Facilitator: Mark Miles
Key Message:
The impending arrival of MiFID II is ushering in fresh questions with regards to value for money. A large number of unknowns make disaggregating costs and charges – one of MiFID’s key requirements – difficult, especially when estimating these up front. A range of response options are therefore being discussed by the industry – namely to demonstrate best efforts and reasonable assessment criteria. These however place the onus firmly on the banks, which few are comfortable with.
Headlines:
- The regulator wants greater engagement between advisors and investors. This should facilitate more accurate pricing and the ability to manage expectations with regards to what investors can reasonably expect from their holdings.
- To deliver true value for money, conversations should pivot from cost and charges towards investor protection and customer outcomes. Having said this, the question of how to validate achievement of clients’ outcomes remains up for debate as goals and investment ambitions usually span over several decades.
- Predicting the impacts of MiFID II and other regulations will be a challenge that many firms are responding to by investing heavily in front office training, developing marketing materials to manage portfolio declines, for example, and ramping up communications training.
- Ultimately, many agree that value for money is linked to good governance, and culturally organisations need to live and breathe values that are in the client’s best interests.
Key themes:
To date, money and effort has already been spent interpreting regulation so delegates expressed frustration at the remaining ambiguity. Several argue that by now, regulators should have devised templates to help standardise how costs and charges – a key concern – are reported.
The KIID document was cited as a good example of a ‘standardised document’ that helped end clients better understand and compare financial products. The worry otherwise is that firms disaggregating costs and fees in their own ways will not directly facilitate comparability for the end investor – and could risk some banks coming across as non-compliant.
This is especially pertinent as traditionally private banks could (and would) give away additional services for free so identifying ways to disaggregate, quantify and charge for these now poses challenges.
Interestingly, ‘value’ is a concept that means different things in different markets: “If you are an international private bank or wealth manager – you are likely to charge different prices in different markets, for example Switzerland vs. Asia vs. the UK – but marrying these up in the eyes of the regulator can be a challenge.”
The regulator argues that pre- and post-sale fees should theoretically marry up but the vast majority in the room agreed that this is not really the case in practice. One delegate said that to stave off this issue, they will not be providing their customers with a cost at point of sale – instead, they are developing a fee schedule with the help of which clients can look at particular products.
This led to questions around whether regulation is more focused on cost or service: “Bells and whistles are not seen as valuable but how else do you differentiate your service?” Moreover, some pointed to the fact that if fees are going to be the primary point of differentiation, then “that’s a race to the bottom in which nobody wins….[Meanwhile] service provision is difficult to scale; we have to think about cost to provision, which is why no one is making money in advice.”
Indeed, some argued that the products on offer are similar, but it’s the service that is the differentiator and that is often the most challenging thing to quantify. Moreover, one delegate pointed out that: “Quality advice is independent of market performance so how do you explain fees in tough markets?” Unbundling costs for products is easier than for advice, and as a result a few wondered if MiFID II was another attempt at RDR, especially in Europe.
The regulator maintains that issuing templates is unhelpful and potentially misleading precisely because business models vary so greatly. Moreover, because the nature of wealth management relationships is so personal, and every client is different, it must be up to the firm to demonstrate, on a best effort basis, the (reasonable) assessment criteria applied when servicing and charging clients.
Some delegates found it helpful to think of the relationship between the fund manager and the wealth manager as that of a manufacturer and a distributor model. The focus is therefore on manufacturers to explain why they’re charging what they’re charging rather than bias anyone towards or against active or passive: “The issue is not in how much you charge but with that approach – what do you provide? What does the client get?”
Besides, numerical target returns are not necessarily best measures of value. This is important to remember, especially when it comes to distributors. “Large numbers of unknowns make estimating and reporting difficult, especially when calculating up front…But then, when conversations become more qualitative (rather than data driven) – what then? How do you disaggregate and price then?” This is why the regulator does not want rigid templates – instead, the flexibility ought to lie with the banks, enabling them to provide justification for the service they’re providing.
“It’s an undisputed fact that clients will pay more for value, so if we’re charging premium rates, clients perception needs to be aligned and they should feel like they’re receiving premium … It becomes about positioning and does your advisor understand your needs? It’s not about what value for money is per se, it’s about what the clients thinks it is, and whether they’re getting it.”
Conclusion:
While it is challenging to predict what the impact of regulation will be – many delegates did say their firms are preparing by investing in training – front office training, preparing marketing e.g. to manage portfolio declines, and rolling out general communications training.
Client sophistication will also need to be better understood and reflected in future conversations.
