Mifid II has proved every bit as problematic as we feared. The development budget consumed across providers, advisers and discretionary fund managers (DFMs) in the lead-up to launch amounts to more millions than anyone cares to add up. And the spending hasn’t stopped.
Key issues with Mifid II?
At The Lang Cat, there are three main areas we believe to be most contentious:
- the 10% portfolio drop rule
- costs and charges disclosure
- the target market.
We issued a questionnaire on these areas to the leading adviser platforms. The results were illuminating and painted a clear picture of a very mixed Mifid II delivery.
There is no room to get into the full detail of our survey here. However, here’s one example of a 10% rule question: What portfolios are in scope, all or just discretionary Answer: All – 33%; Discretionary only – 67%
It’s not only a confused picture in terms of which types of portfolio are being reported on – a similar picture emerges right across the 19 questions we asked.
Another key difference is whether the client, adviser and DFM are notified of drops. It’s a mixed bag right across the industry.
Can tech help with 10% rule?
At The Lang Cat we recently had a demo of a new piece of kit from software developer FinoComp, which you might be familiar with as the technology provider behind Aegon and Novia’s on-platform Capital Gains Tax calculators, among other things.
TierDrop is designed to deal with that gnarly 10% portfolio drop. The problem for DFMs is that they are likely to be running their portfolios across several platforms. And it’s difficult for them to see who their individual clients are, because it is advisers that add clients to the models.
Yet most people just about agree that DFMs are on the hook to notify clients if their portfolios do fall into the 10% drop category during any given reporting period. And that can be tricky because, while the DFM is running the models, it doesn’t necessarily have the relevant client level data.
For example, the DFM knows what the performance of each of its portfolios is but doesn’t necessarily know when the client came into the portfolio or, where applicable, which version of it.
Another issue is that platforms have vastly different methods for calculating the 10% drop. For example, clients in the same DFM portfolio on different platforms may receive different 10% drop reports depending on how the platform they are on has carried out the calculations.
TierDrop aims to solve that conundrum by playing back client-specific performance data to DFMs, platforms and advisers. Importantly, it can ingest data across as many platforms as the DFM is using.
It then plays back the number of clients invested, their opening balance, the reporting date and net movement.
It also takes into consideration genuine capital movement and money moved around the portfolio, so that performance reporting is as accurate as it should be.
When someone becomes reportable, the DFM, platform and adviser are informed via an automated email. This is the part where, regardless of who is, or isn’t, on point to inform the investor, can be configured to each provider’s agreed approach.
Currently there are two platforms signed up to the service, Aegon and Novia, and only one DFM, Copia Capital Management. So those portfolios running on either of these two platforms can benefit from the service.
The Lang Cat likes the functionality and it looks great. Clearly, FinoComp is aiming to corner the market – for this and other data-heavy issues – as the one that supplies the clever calculations in the background.
Need for centralised solution
It would be nice to see a common approach across the sector in the UK and there is no doubt that, despite the good intentions of Mifid II, we are some way to it being efficiently realised on the ground.
For TierDrop to make a significant difference across the market, we would clearly need to see both platform and DFM adoption throughout the sector – and that is the challenge here.
Platforms and DFMs have devised their own solutions to this and will undoubtedly argue that their own solutions work fine.
The reason I think we need a centralised solution to issues like this is because of the way in which the centralised investment proposition (CIP) market has evolved.
Access to DFMs is effectively modularised, where you can access most DFMs via 10 or even 20 plus different providers. The same applies to non-discretionary CIPs, which is less of a problem here specifically but is still an issue in the spirit of things.
Add to that picture the existence of discretionary CIPs that aren’t DFMs and providers that specialise in these, such as Parmenion and Raymond James, and you have a real hotchpotch.
This, then, is a classic example of where smart technology can solve the problem but it will take everyone to play nice together – and that is usually the hardest part.
Further reading:
Mifid II is widening the advice gap
By Terry Huddart, market analysis manager, The Lang Cat
