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Advisers face fee pressure with Mifid & markets 'double whammy'

IFAs’ charges and their model portfolios are about to come under intense scrutiny thanks to the ‘double whammy’ of new Mifid II disclosure requirements and stock market gloom

Advisers face fee pressure with Mifid & markets 'double whammy'

IFAs’ charges and model portfolios will come under intense scrutiny thanks to the ‘double whammy’ of new Mifid II disclosure requirements and stock market gloom according to the Lang Cat.

By 29 April, advisers are required to send their clients a disclosure document outlining the performance of clients’ funds along with the costs of every part of the value chain. The new requirement, called ex-post disclosure, comes in as part of Mifid II (see boxout below).

Speaking today at an event held in association with Standard Life, Mark Polson (pictured), principal of the Lang Cat, said he expects this new disclosure requirement, coupled with markets arrowing down, to put IFAs’ investment processes and charges really under the spotlight.

‘Advisers will always say “my clients aren’t worried about market downturns, I have got them well drilled.” Let’s find out – that premise is about to be tested to destruction. Because at the same time that markets are hitting the fritz, we have new stuff that is coming out that says “by the way you just paid x to lose money, happy with your wash?”

‘This is brand new, clients have never had this kind of experience before.’

Polson gave the example of a paraplanner who showed him an adviser’s ex-post disclosure document for the last year where the client’s portfolio had lost 12.5% on a £250,000 Sipp portfolio while the total charges were 2.4% including a 1% advice fee, 1% for fund management and 0.4% for the platform.

What is MiFID II ex-post disclosure?
By 29 April 2019 IFAs must send their clients a document which outlines the costs and charges for advice, products (Sipp and platform) and investment management as well as the performance of the portfolio in percentage and pounds and pence. Insured pensions are not included – but most platforms are including them anyway, according to Polson.
It will show what the portfolio was worth 12 months ago and what it was worth 12 months later. Although the onus is on advisers doing this, platforms will also produce these sheets and it is unclear if platforms will send them direct to clients or go through advisers.



Advice model scrutiny

Polson said scrutiny of disclosure will be even more intense on advisers running their own model portfolios (around 55% according to Lang Cat research) because investment responsibility remains solely with adviser. 

He added that many advisers launched their model portfolios after the financial crisis and so all they have experienced are ‘relatively benign markets – certainly not a major downturn’.

‘What we don’t know is what is going to happen to these models when the cold wind blows.’

He said the worst-case scenario for these model portfolios is if they hug markets and fall when indices drop, meaning the client has ‘effectively bought a very expensive tracker, because it is so diversified’.

‘If you crawl inside a lot of the portfolios the level of diversification is amazing; 30 or 40 highly diversified funds – you have basically just bought the index. I am not too sure diversification works any more. The theory they [portfolios] are built on says it does but there are plenty of studies from across the water that says the old order is changing and we are not really sure [diversification] works any more.’

In a white paper published alongside the event, Polson said adviser's model portfolios will soon only be ‘found in small specialist operations' or for firms which completely separate financial planning with investment management functions. 

At the event David Tiller, head of UK propositions at Standard Life Aberdeen, said that model porfolios will come under increasing regulatory scrutiny along with further focus on IFAs' charges.

‘There is inconsistency at the moment because the way a multi-asset fund is regulated is very different to the way a discretionary model is regulated and an advisory model is different again. That will not persist forever - the regulator is going to standardise that and it can’t possibly be right that you have different things all trying to do the same thing regulated in a different way.

‘We get a situation where advisers need to deliver better outcomes at lower costs than they are doing today. That is a double whammy.’

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