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A helping hand for Mifid II costs reporting

The new regime provides an opportunity to make client communications more accessible and easy to understand

Mifid II will increase an adviser’s responsibility for disclosing the cost of investment products. While many will consider this another unwelcome burden, perhaps it represents an opportunity to start making client communications more graphic, accessible and easy to understand?

A number of technology suppliers have recently given me previews of what they are planning to deliver. Morningstar, in particular, has put forward some impressive work.

In addition to advice fee disclosure, firms now need to consider how they will provide pre- and post-sale reporting on the cost of investing based on whatever assumptions they are making (i.e. the amount being invested, expected return and timeframe).

Regulation overload: Are advisers ready for the Mifid II mountain?

The impact on potential investment returns of both the adviser’s fees and asset management fees must be presented in monetary terms and percentages.

Technically, firms only have to give a breakdown if clients ask for it but they must provide the aggregated level of fees as a matter of course. In practice, it will be best to have systems that can deliver such information automatically as it is inevitable the media will encourage clients to ask for it and expect firms to deliver promptly.

Most of what I have seen so far focuses on meeting the immediate 2018 need to provide pre-sale reporting. From 2019 onwards, there will also be the obligation to report post-sale on what costs and charges have been accrued and how they have impacted the investment.

While well intentioned, Mifid looks certain to create a whole load of extra work. Will it really deliver more value? Will consumers actually be better informed and make better decisions? Almost certainly not if we simply end up delivering more reams of paper to clients.

This is why I really like the approach Morningstar is taking, with all developments being designed around delivery to mobile phones. The demo I was shown makes full use of graphics and visuals to highlight information to consumers and shows just what we could achieve.

Morningstar tells me it is building APIs which can support third parties, such as other technology suppliers and platforms wanting to plug its data and capabilities into their own services, as well as a front-end tool which will be part of its Adviser Workstation.

Using this, advisers will be able to enter client portfolio details and load up any service fees and additional fees they want, including one off or recurring fees as a percentage or fixed amount. The system will then take the assumptions, amount invested, time horizon and expected return entered to generate the necessary reporting.

Regulation: Do Mifid II and the GDPR have conflicting aims?

At this point, it is important to put the API approach into context. This is designed for use by organisations with significant technological capability; it will not be something adviser firms can use to build DIY solutions.

In addition to cost reporting, the service will also include the ability to show the cost benefit of a switch – for example, to provide a more diversified portfolio or investments that better fit the client’s objectives or risk profile, which are further Mifid requirements.

Morningstar is looking to deliver these new services by the end of the year. It will initially only deliver pre-sale reporting but this is probably as good as, if not better than, anyone else is going to achieve. I would certainly suggest its offering is worth considering.

The precise position regarding post-sale fees remains unclear. I understand the European Securities and Markets Authority has stated in its latest, non-binding, Q&A document that it thinks firms should make best efforts to report on this basis next year. That said, other views suggest 2019 is the practical deadline for this requirement.

Ian McKenna is director of the Finance & Technology Research Centre

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