With all of the uncertainty surrounding the Markets in Financial Instruments Directive (MiFID II), one thing is certain. MiFID II, which became effective 3 January 2018, has introduced a new level of transparency that the wealth management industry will need to attain. Despite the grumblings, among wealth management industry trends, this is not a bad thing. In fact, a strong case can be made for why wealth managers and their clients will benefit from MiFID II’s new requirements.

MiFID II Fundamentals

It’s not surprising that many asset managers are anxious about MiFID II and how it will affect them. A survey conducted at the Northern Trust Annual Regulatory and Depository Conference found that approximately 50% of the investment managers and consultants canvassed believed client reporting would be their most challenging MiFID II requirement. Within the same survey, transaction and transparency reporting, inducements and research, and updating of client documentation were cited.

Another survey was conducted in the fourth quarter of 2017 by the global institutional trading network, Liquidnet. The study, titled “Re-Engineering Best Execution,” reported that:

  • Just 6% of the asset management firms surveyed say they are ready to meet the standards set by MiFID II,
  • 61% recognize they need to increase the detail in their policies, and
  • 89% know that they will need to take a significantly different approach in their policies across the assets classes and methods of trading to meet MiFID II’s best execution standards.

Rising to Meet New Challenges

There’s no question that key provisions of MiFID II relating to independence, transparency and suitability require a new way of thinking and operating. For example, wealth managers who want to operate with independence must now ensure that they are offering a “sufficient range of products” that effectively meets the needs of their target markets. They also must clearly define their target markets.

MiFID II requires wealth managers provide their clients with heightened reporting; at least quarterly portfolio reporting that encompasses the rationale and explanation behind their portfolio decisions (e.g., what financial instruments were used, associated costs, and expected impact on future returns).  The directive also expects advisors to reveal their investment research related costs and transaction partners.

MiFID II’s overall objective is to increase the advisors’ accountability and reduce conflicts of interest and other market abuses in order to serve investors’ best interests.  More specifically, the regulation is intended to drive:

  • Increased market transparency,
  • Clearer costs relating to trading and investments,
  • Lower research/market data costs,
  • The application of best execution/best practices, and
  • A shift in trading towards more structured marketplaces.

Capturing New Opportunities

MiFID II will cause asset managers to more carefully discern their costs relating both to investment research and trade execution.  This heightened scrutiny and cost-consciousness, even if prompted by regulatory demands, is likely to make asset managers perform better in their transactions, make wiser partner selections, and become more disciplined in their spending.  They will seek out partners who offer cost-efficient investments and specialized, higher quality, higher value sources of research. Ultimately, these behaviors will strengthen their portfolio performance and streamline their operations.

Besides driving leaner, best practices, MiFID II will enable wealth managers to reflect a greater commitment to meeting their clients’ best interests. Their professional integrity will be showcased through a more transparent relationship wherein clients’ second-guessing will be mitigated by heightened disclosures and fee transparency. For active managers, the transparency will also facilitate better returns and arm them with a way to justify their higher fees over passive investing managers.

On this basis, MiFID II will strengthen the wealth manager-client relationship, building greater loyalty and encouraging more referrals. It also is expected to generate greater confidence in the European capital markets and help capture investors who previously were not in these markets. MiFID II’s effect will extend beyond Europe due to its complexities and its impact on operations.

Comments to: MiFID II’s Transparency – IS Good for the Wealth Management Industry

Your email address will not be published.