How to demonstrate value to clients under Mifid II rules

Under Mifid II rules, advisers will have to disclose costs and charges in full, separated clearly on an annual basis, issuing each and every client with a comprehensive financial statement.

Under Mifid II rules, advisers will have to disclose costs and charges in full, separated clearly on an annual basis, issuing each and every client with a comprehensive financial statement.

According to some commentators, clients might sit up and take notice of this, especially in the event of a market downturn that negatively affects their returns. The method of presentation itself might even be something advisers wish to mitigate. Clients will, for the most part, receive these statements by post, without an adviser on hand to explain why certain costs have been incurred and what they represent.

Ahead of the first issuance of Mifid II compliant annual fees disclosure, advisers will need to make sure clients are fully aware of the unique value being provided for the fees they are paying.

From cashflow planning to behavioural coaching, connections to other professional services or qualifications and expertise, firms will need to be able to clearly document and articulate the ongoing benefits of their service that extend far beyond simply managing money.

Under Mifid II rules, advisers will have to disclose costs and charges in full, separated clearly on an annual basis, issuing each and every client with a comprehensive financial statement.

According to some commentators, clients might sit up and take notice of this, especially in the event of a market downturn that negatively affects their returns. The method of presentation itself might even be something advisers wish to mitigate. Clients will, for the most part, receive these statements by post, without an adviser on hand to explain why certain costs have been incurred and what they represent.

Ahead of the first issuance of Mifid II compliant annual fees disclosure, advisers will need to make sure clients are fully aware of the unique value being provided for the fees they are paying.

From cashflow planning to behavioural coaching, connections to other professional services or qualifications and expertise, firms will need to be able to clearly document and articulate the ongoing benefits of their service that extend far beyond simply managing money.

Darren Lloyd Thomas says...

We looked at this back in January. It is vital to constantly show the value you are delivering. It is not just about profit or loss, it is the extra things you do throughout the year. That can be cashflow modelling, altering risk, taking them to a lawyer, helping with trust work. Whatever it is, you need to demonstrate the value you are adding for the client.

It could be going as far as pointing out the time you have put into studying and taking an extra exam that has enabled you to give the client extra help in an area such as long-term care, for example. It is all about adding value for the fee you are charging, so the client can see in real time that you are never standing still. That has to be the key message, and is something we have always tried to do.

Being able to meet where the client wants to invest is also really important, whether it be mainstream or ethical.

Go further

At our quarterly review with clients, we let them know about any underlying stamp duty costs or any new costs that are starting to show themselves.

Our platform, Old Mutual Wealth, does a really good breakdown on it. It will sometimes show, for example, that passive funds are not as cheap they seem, which is interesting.

We also made sure we had a method in place of communicating the underlying stamp duty cost so we have a calculation format we use.

In our annual reviews we go back through it again, and throughout the year we vary our news feed to clients, showing them the value in different things we are doing for them.

Show your working

Under Mifid II, you also have to demonstrate you have carried out an annual review. Where before you might have said ‘we made three attempts’ to get in touch, you now have to demonstrate you have done it. That is hard if you have a client that does not want it.

We make sure we provide clients with a comprehensive analysis and at least make sure we can evidence that they have seen it. It is about being smarter and making sure nobody falls through the cracks. 

Heather Hopkins says...

The question is whether clients will pay attention to the Mifid II compliant fee reporting. There has been a lot of expectation that customers would query fees but that has not been the case so far.

There is some indication investors will react if there is a notable decline. The fees disclosure, along with potential negative returns, could raise scrutiny around fees more than it has in the past.

Change perceptions

Articulating value will be different for every firm, based on what value they are offering customers. But they will need to make sure they have a really strong view and are talking to customers before they get the statements about the value of advice they are receiving.

I often hear from advisers that they do not get pushback on their own fees, it is the other fees they get questioned on. But I did some qualitative research with investors earlier in the year and the perception was that their relationship was with the adviser.

So they did not think about fees in terms of what went to the platform, what went to the asset manager and so on. The whole pot of fees was associated with the adviser, and they were responsible for making sure those fees were reasonable.

Demonstrate value

Vanguard has a concept called Adviser’s Alpha, which talks about behavioural coaching adding around 150 basis points in value to the client. That is really important as sometimes clients underestimate that. The adviser needs to keep track of what is valuable to the client while also reinforcing what they have done for them.

This Mifid II year-end statement comes through the letterbox to the customer. They will be sitting at the kitchen table, not with the adviser, opening that and seeing that their portfolio would have grown by x amount if they had not had the fees taken out. That could be quite shocking initially.

A large vertically integrated adviser recently did some testing with Mifid II compliant statements. 30% of clients said they would query the fees, while 30% said they would do research online.

Whether the numbers will be that high or not, we will see. But advisers need a clear view on their value and need to be articulating it before the client gets the statement through the letterbox.

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