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Advisors are Running into Overlooked MiFID II Challenges

Traders Magazine Online News, April 8, 2019

John D'Antona Jr.

Meeting MiFID II’s requirement that advisors identify the appropriate target markets for the products they recommend is proving problematic for some firms. And the regulator looks to be running out of patience, according to the latest The Cerulli Edge—Global Edition.

The Product Intervention and Product Governance Sourcebook (Prod) requires advisors to not only have a process in place to capture and segment their target market, but also to provide advice services and investment solutions appropriate for those segments, says Cerulli Associates, a global research and consulting firm. Prod links the U.K.’s Financial Conduct Authority’s (FCA) suitability requirements and MiFID II’s appropriateness requirements.

“When MiFID II was implemented more than a year ago, it was the requirements for greater disclosure of costs and charges and the unbundling of investment research costs that stood out from what was a wide-ranging slab of regulation,” says André Schnurrenberger, managing director, Europe at Cerulli. “Other new rules with similar potential for disruption were somewhat overlooked. One such example is Prod, which many firms are now having to catch up on.”

Prod is particularly significant for distributors such as financial advisors and wealth managers. Its low-key introduction was perhaps underlined by the FCA initially taking a relaxed approach to its supervision of the rules in order to let them bed in. However, the regulator’s attitude is now hardening.

Research indicates that a considerable proportion of advisors feel unable to demonstrate the suitability of products and services by client segment, potentially putting them in breach of the regulations.

As advice firms continue to review their investment propositions amid growing due diligence and suitability requirements and increased compliance costs, more are concluding that retaining a direct involvement in fund selection is simply not viable. Most advice firms now outsource these areas, fueling the rise of centralized investment propositions.

“Prod undermines the sustainability of pure advisory models and accelerates the shift toward outsourcing to discretionary fund managers, multi-asset/multimanager propositions, and model-portfolio services,” says Schnurrenberger. “With so many model-portfolio services available to use with clients, advisors are questioning whether they have access to the same level of resources that these investment managers have, and if they can offer a similar outcome for an equivalent price.”

For some firms, the Prod requirements represent a significant change in approach. “They arguably require a ‘soft’ approach to client segmentation—accounting for behaviors, sensitivities to conditions, and their propensity to buy certain products — that many firms are not culturally or technically equipped to carry out,” says Schnurrenberger.


•             In the U.S., Cerulli survey data indicates that request for proposal (RFP) activity over the next three years will mirror a number of overarching trends in the country’s institutional space, including an emerging preference among clients for new, more complex, and bespoke products and services, including institutional custom solutions. One-quarter of the asset managers polled by Cerulli in the U.S. expect a jump of more than 10% in due diligence questionnaires for 2019. More than half (63%) anticipate an increase of between 0% and 10%.

•             In Europe, asset management clients are seeking a more personalized approach to RFP, underlining the additional focus being put on achieving specific objectives and moving away from mere box-ticking. Cerulli has found that greater emphasis is being placed on managers providing evidence of environmental, social, and governance credentials, via either the RFP or separate documentation. “Technology has the potential to ease the administrative burden on groups without them having to invest in extra personnel, but it is early days and the requirements of customized RFPs remain a hurdle,” says Schnurrenberger.

These findings and more are from: The Cerulli Edge—Global Edition, April 2019 Issue.

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