The most important perspective is investment risk
As many have commented, themes that have emerged in the new MiFID rules are actually UK regulatory concepts that have been 'sold in' to the European bureaucratic machine and returned to the UK as part of Europe wide regulation.
It shouldn't come as a surprise that there are some difficult adjustments to make as things always get lost in translation. ESMA is the independent EU authority that is missioning to safeguard the EU's financial system by 'enhancing the protection of investors and promoting stable and orderly financial markets'. This is the same as the FCA's role of 'make financial markets work well so that consumers get a fair deal'.
It is true that most recent thematic reviews relating to the quality of advice have been comfortable with 'outcomes', and comfortable with the job advisers have done in coaching and supporting their customers towards brighter financial futures. However, the reports have been universally scathing about the quality of research provided. It is new standards of disclosure and proof of suitability that are going to hurt some firms.
Recall Thematic Review 16/1 (Assessing suitability), that attributed poor investment outcomes to 'poor quality of an advisory firm's research and due diligence'. Good firms, the paper maintains, exhibit a culture of 'challenge', and are performing appropriate research regularly and consistently. They are certainly not over reliant on their favourite product providers or platforms.
Consultation Paper 17/16 (4.34) has picked up the theme stating that:
"firms should be able to satisfy themselves that the use of such software is not expected to result in the channelling of business from the advisory firm to the provider or platform and does not need to be relied upon by the advisory firm in the future in order to continue to service its clients."
My worry is that the approach to MiFID that many advisers are adopting is to increase reliance on providers, rather than seek to establish independent research to meet the challenges.
The new concept of 'ex-ante' and 'ex-post' disclosure and review adds a further interesting twist. Before, 'research' often meant that you had looked at something. The new world requires evidence of how accurate the assumptions/illustrations/forecasts were. Many of us despaired in the old days at the quality of what passed for 'research', as we knew the data was wrong, or it had too little academic or intellectual rigour behind it. A specific requirement of MiFID is that all tools are understood, including their shortcomings. Poor quality research will be found out quickly, as the audit trail needs to be maintained and data that is wrong and has a material impact on client outcomes will quickly come back to bite the adviser.
At Synaptic, many of our customers are larger groups whose compliance departments are working furiously to put processes in place, whether they be templates for fund recommendations or tick boxes for reviews. However, many are independent advisers, many of which are directly authorised and will have to figure this out for themselves.
My advice would be to stick to quality tools that facilitate reviews and illustrate costs in detail such as Synaptic Comparator; and tools that provide accurate (proven historically) probability-based forecasts for growth and potential loss, such as Synaptic Modeller (built around the Moody's model). Three of the six categories outlined in the ESMA MiFID template relating to 'Target Markets' relate to risk/reward management (Ability to bear losses/Risk Tolerance and Client objectives). Keep your focus on managing these and the bureaucratic challenge will start to appear more manageable. It is always better to paddle your own canoe than rely on what comes from above!
Synaptic Risk – complete framework for success
Supplied by A2R, the ATRQ in Modeller is also accessible through the Synaptic Suite (please call 0800 783 4477 to request access). In aggregate is the most widely used questionnaire in the industry as it is aligned with Vanguard, Royal London and other market leaders. Moody's recommend the A2R questionnaire when working with their risk models.
This is defined out of the industry's leading risk management model, the Moody's stochastic engine that has been proven over decades, including the downturn and subsequent market turmoil. It provides a range of probable outcomes for any investment (on a client-by-client basis using Synaptic Modeller), as well as a measure for downside risk (likely losses in the worst year for any strategy over a 20-year term). You are able to use the latter measure as a measure for risk, in order to accurately and consistently assess 'Capacity for Loss' for clients.
Aligned with the ATRQ and the Investment strategy are the Synaptic Risk Ratings. These are calculated using the Moody's model, and are free from the 'committee-based' bias of competing approaches. The Synaptic ratings are widely published, used by more and more firms to meet the more exacting requirements of modern pension advice and MiFID requirements.