Going the other way
The full effects of recent regulation are yet to be seen, but Mifid II already seems to have had an impact on the advice industry. However, research on the consequences suggests advisers may be reassessing their client base, and even upping their fees, rather than simplifying on the investment side.
Platforum data published in August 2018 found that more than 40 per cent of advice firms had reviewed their charging structures over the previous six months.
The research provider noted that the new rules had “prodded advisers into reflecting on the way they explain to clients how much they are paying, and what for”. But this didn’t tend to prompt a lowering of fees: instead, it prompted intermediaries to “reassess the basic economics of their businesses”.
More than half of those surveyed actually increased their charges, either for all clients or lower-value ones, while many others made no change at all.
“When advisers analyse how much time they spend on individual clients and what they need to charge to cover their costs, it often turns out that they are making losses on lower-value investors,” the firm noted.
Intermediaries who feel under pressure – either to compete on cost or to stay on top of regulation – may find it more useful to reassess other elements of their business. But revamping portfolios may help. Mr Buttercase expects client charges to fall by between 0.2 and 0.4 percentage points in certain cases following his planned changes.
Changes made within portfolios may prove easier to implement. For one, advisers still have scope to make greater use of passive products, where appropriate, as a means to reduce costs.
Most advisers now use a blend of active and passive funds, according to Platforum analysis. But the same research found that 53 per cent of advisers only allocate between 1 and 20 per cent of assets to passive.
“The main driver for the use of passives is advisers’ desire to keep down the total costs of investing for clients,” the company notes.
“We expect this trend to continue and be reinforced as advisers increasingly feel the impact of Mifid II reporting requirements in 2019.”
Unsurprisingly, there is still resistance on this front. Platforum describes a large contingent of advisers who “firmly believe that active management delivers higher returns than passives, and that actively managed funds will prove their resilience in the next market downturn”.
With market volatility having made a comeback, intermediaries who view active products as the best way through difficult markets are likely to be even more reluctant to change tack.
Similarly, advisers who believe in the merits of diversification may feel unwilling to stake substantial assets on the success of a smaller number of products. But if Mifid II reports do make larger portfolios look unwieldy, such instincts may be put under pressure both this year and in those to come.
