The new year lies just a few weeks away. I suspect it will be quite a challenging one, starting with Priips on 1 January, then quickly onto Mifid II two days later. Do not ask me why the dates differ. In fact, the more I look at these new EU regulations, the more I am convinced the teams that created them did not speak to each other.
And while the objectives of both are sensible, I doubt they will do much to improve UK clients’ understanding of what they are buying and how much it will cost. Unlike most of the EU, we already have regulation that deals with these issues.
Mifid II’s requirements to provide more clarity and visibility regarding fee disclosure should create both opportunities and challenges for advisers. Some firms may choose to re-consider their existing fee models, perhaps by a structure which contains both basis points fees plus financial planning fees at fixed costs, project costs, hourly rates or whatever.
This might be more complicated than a “one size fits all” approach but the change in rules may well drive a need for advisers to demonstrate value more explicitly.
The rumours Mifid II would demand that phone calls were taped has been put to bed. A record needs to be made of any calls or meetings which may lead to an investment decision but this could be in the form of written notes.
That said, some firms will choose to tape meetings and calls for a number of reasons. First, it saves time. Second, apps are being developed such that can react to key words (maybe “Thailand”, “off-plan” “guaranteed” to name just a few?). Third, in the event of a complaint, concrete evidence will be available. As far as Priips is concerned, I am not convinced the new key information document is fit for purpose, if that purpose is to better inform consumers. The reality is that the more pages put in front of a consumer, the less likely they are to be read.
I have yet to see a Priips KID but I understand it might take three pages of A4 to convey all the required “information”. Fifteen pages if an adviser is recommending a portfolio of five funds.
Other 2018 regulatory issues will include the Asset Management Review, General Data Protection Regulation, Senior Managers Regime and Platform Market Study.
The latter of those will be a comprehensive piece of work requiring significant resources to complete and heavens knows what else to analyse. That said, the size and complexity of the platform market deserves a “drains-up” review, if only to provide the FCA with an understanding of the propositions and financial dynamics.
Aside from regulation, the highest profile issue next year will be defined benefit to defined contribution transfers. On the positive side, this could provide excellent, possibly life-changing outcomes for many consumers, as well as substantial fees for advisers and record sales for providers.
On the less positive side, though, a wide-ranging FCA market study might confirm the unsuitable and unclear consumer outcomes that emerged from its initial small survey, leading to a miss-advising scandal downstream. The remediation process has already been announced and the costs of missadvice will be substantial.
Another important issue will be “The Market Correction”. Not unconnected with the pension transfer issue, a significant correction is a clear possibility in 2018 and will spook most clients in drawdown. Managing expectations has never been more important than now.
I hope next year will bring more innovation in drawdown asset management propositions. There are some funds designed specifically to provide retirement income but it would be good to see more. I am sure many advisers will be developing outcome-related centralised investment propositions to meet this need. In an ideal world, insurers would use their balance sheet and risk management capabilities to provide some form of underlying guarantee. But that does not seem likely any time soon.
Will 2018 see most robo propositions move into profit? Frankly, I doubt it. First, the cost of customer engagement is likely to remain high; second, several firms are hiring expensive advisers to provide advice online or over conventional telephony; and, third, banks are likely to become serious competitors in this space. Not least because they already have the customers.
It seems to me the underlying theme next year will be consolidation. Did you know there are still about 2000 advice firms with just one adviser? As costs continue to rise and owner-advisers seek to retire, more mergers and acquisitions in pursuit of economies of scale seem inevitable.
We are likely to see some consolidation in the asset management space too, with the results from the Asset Management Review hastening this process.
The desire of providers to get closer to customers will also continue. When I say “customers” I am using the vocabulary of those providers. This is an important point because when institutions buy advisers they are then dealing with “clients” not customers – they have to sell advice, not products. And this can be a cultural challenge. There is limited access to data regarding successes or failures in this transaction landscape but the publically available numbers are not encouraging.
What is encouraging is that the demand for investment advice and financial planning is likely to increase further in 2018 as a direct result of the pensions freedoms, the DB transfer market and the ever-growing number of at-retirement consumers looking for help as they plan for the rest of their lives.
Malcolm Kerr is senior adviser at EY