A whole new raft of disclosure requirements is about to hit advisers and their clients under Mifid II.
It looks as if quite a few firms are not yet ready for these major changes. If this comes as news to you, or you have put off trying to get your brain round it, you need to start taking it very seriously. It will have a major impact on your advice processes and the way clients will look at your charges.
So if you do not know about this, go and look at the FCA website and talk to your compliance consultants. If you do not have one, visit the Association of Professional Compliance Consultants and browse the directory of consultants there.
Do not think you can lie back and leave it to the providers, platforms or discretionary fund managers to do all the work for you. They will undertake a lot of the heavy lifting, and you need to know what they will take responsibility for, but you will almost certainly be pulling it all together in many instances.
The first requirement is that you provide an estimate of the aggregated cost of investing in advance. Then, for ongoing clients, you will need to provide at least annually an estimate of the costs in advance and then an account of the actual costs incurred in arrear.
The disclosure of costs is intended to be comprehensive, consisting of:
- Any costs of providing investment advice (one-off, ongoing, transactional and ancillary)
- The up-front and annual costs of any investments you recommend
- Details of how the client will pay (e.g. through the product or platform)
- Payments to the adviser firms such as discounts and rebates by providers and other third parties
The FCA’s aim is for clients to be really clear about their total costs of investing as early as possible. You will need to provide clients with a breakdown of costs and charges in pounds as well as percentage terms. So you will need to disclose estimated costs first in your client agreement and then, when you have a better idea of them, in your suitability report.
It will be important to disclose the actual aggregate costs of investing before you make recommendations – either in the suitability report or earlier. That could require a rapid response where, say, an existing client wants to invest very quickly, perhaps to top up a pension or Isa.
Your own costs of advice should be reasonably easy to forecast and then report on the actual figures. If they are not, you need to take a long hard look at your existing systems.
I suspect the main work will be in collecting together the charges made by product providers, DFMs and platforms and adding them onto yours.
It should be reasonably easy with platforms. They should be in a position to provide the advance and past history of aggregate charges for clients, probably even including your own charges. But it might not be straightforward in all cases. Think about switching between platforms during a year, for example.
Much of the challenge will come with ongoing clients who have some or all their investments off-platform. Those with several holdings on which you are advising could be more complicated. And the more ongoing clients you have, the more of a challenge it will be.
As Threesixty managing director Russell Facer says: “With the General Data Protection Regulation, Insurance Distribution Directive and Senior Managers Certification Regime coming in the next 12 months, you will need a clear plan to minimise disruption to your business.” See below for a proposed plan of action.
Danby Bloch is chairman of Helm Godfrey and consultant at Platforum
Cost disclosure preparation checklist
- Find out from all the platforms you use how they are going to provide you with clear information about the estimated costs of investing for advance disclosure to clients. Different portfolios with different funds will produce different total costs. How will the platforms classify them in general terms? How will they assess the likely cost of a personalised portfolio you construct for a client? How will they deal with DFM costs?
- Check with all the platforms you use how they are providing you with information about individual clients: the format of the information, the speed of reaction, the ease with which you will be able to incorporate the numbers into your reports to clients.
- Check with DFMs you use what they are planning to do and what they will not be doing.
- Check the situation with product providers. Some of the smaller ones and those overseas might be less prepared than the large UK institutions.
- Decide on the broad information you will supply clients with at the start of your relationship with them. One size will probably not fit all.
- Decide how you will store and access data about fund and platform charges to compile the disclosure reports.