When the Markets in Financial Instruments Directive II (MiFID II) hit the UK financial services industry earlier this year, it brought a whole raft of multiple regulatory implications to the financial planning landscape. MiFID II builds on the original Directive, with the aim of further strengthening investor protection, and carries a heightened focus on the key elements of suitability and transparency.
Implementing a defined process for selecting investment strategies allows you to demonstrate clear parameters that you can, in turn, apply to your segmented clients. At the end of the day, your selected investment strategy must match your client's appetite to risk and ability to bear loss.
Whilst these are principles we stand behind, transitioning the theory into practice has proved to be challenging for many advisers. With this in mind, how can you ensure that the MiFID II regulatory storm acts as the wind beneath your wings, rather than blowing your house down? In this article, I will explore the potential investment solutions which can help you to overcome the challenges of MiFID II, and provide an enhanced service to your clients.
The starting line
Whether you outsource your investment strategies to a discretionary fund manager, or simply choose to implement your investment strategy through an advisory capacity, the MiFID II Directive requires that you demonstrate client suitability and risk alignment throughout your centralised investment process (CIP). Implementing a defined process for selecting investment strategies allows you to demonstrate clear parameters that you can, in turn, apply to your segmented clients. At the end of the day, your selected investment strategy must match your client's appetite to risk and ability to bear loss.
So how do you select the appropriate investment solution to meet your needs and, most importantly, the needs of your clients, and how do you implement and monitor your investment solutions in the most efficient way? In addition, how do you monitor the performance of your investment strategies against your expectations, ensuring your strategy always aligns with your risk profiling tool?
For an independent business model you will need to start with a review of the relevant market. Enhanced suitability questions can be used to filter out investment options that are not suitable for your clients. You will need to conduct a robust assessment of your client's attitude to risk, tolerance for loss, and ability to bear losses. Tools such as Centra (the end-to-end financial planning system designed by the SimplyBiz Group and powered by Defaqto) allow you to select investment strategies that are appropriate for your client, by aligning investment solutions with your client's needs.
The MiFID II Directive requires that you document and formalise your centralised investment process. You will need to outline the processes that allow you to conduct research and planning, determine your client's risk profile, set recommendations and finally compile a suitability report (which must be issued prior to the recommended product transaction being concluded). The Centra system allows you to deliver on all these process requirements and seamlessly links all elements of your CIP, whilst still allowing you to retain your independence by using a whole of market independent tool.
With these issues in mind, which investment strategies should you consider?
- Risk versus return: At the outset, you will need to agree your client's attitude to risk. You will also need to manage your client's performance expectations in relation to their risk tolerance. In order to meet your client's expectations, make use of an investment solution that will absolutely align to your risk profiling tool.
- Adherence to strategic asset allocation and volatility parameters: Seek out investment solutions that adhere to the strategic asset allocation and volatility parameters of your risk profiling tool. Find an investment solution you can be certain will not deviate from these parameters, and is designed to deliver to your expected risk and return consistently.
- Fixed strategy conditions: Look for investment solutions that give you the power to set the conditions for your clients. Whether you choose an active or a multi-index strategy, select an investment solution which gives you the mandate to populate that strategic asset allocation that will, in turn, align to your risk profiling tool.
- Clear parameters that match your target market: Utilise investment strategies that have a proven track record of performance in line with your risk and return expectations, fall within your strategic asset allocation and volatility parameters, and meet your expectations.
- Reporting: Choose investment strategies that provide you with clear and transparent reporting and that allow you to demonstrate your client's fees in relation to performance in a transparent manner.
At Verbatim Asset Management, we understand the many challenges advisers face in the management and construction of investment portfolios. With the ever changing regulatory landscape, the advisory process in today's world has become varied and complex. We understand that it is vital for you to find the best investment solution that matches your clients' needs and fits perfectly into your centralised investment process. We offer a range of active and passive portfolio funds, managed model portfolios and a unique discretionary management service. Our investment solutions are overseen by our Independent Investment Committee, which brings with it a wealth of knowledge and expertise to provide governance, oversight and monitoring for all of our products.
We are proud to offer investment solutions that are designed to fit seamlessly into your investment proposition and meet your and your clients' expectations consistently.
Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The portfolios’ investments are subject to normal fluctuations and other risks inherent when investing in securities.
Verbatim Asset Management has taken due care and attention in preparing this document, which is solely for the use of professional advisers. Verbatim cannot be held responsible for any inaccuracies arising out of information detailed within and will not accept liability for any loss arising out of or in connection with its use.