Client reviews...and MiFID II 

We have been living in MiFID II World since the beginning of the year, and it is true to say that many providers are still ploughing their way through what has turned out to be a nightmarishly un-nuanced implementation of the EU's blunderbuss approach to financial regulation.  It feels at times as if whatever 'good' there was at the heart of the new regime has been wholly distorted by a brutalist approach to rule-making that is profoundly insensitive to the impact on real customers.  One still encounters articles in the financial press lamenting the disenfranchisement of perfectly good clients who have had the misfortune to be priced out of an advisory market by the latest species of Brussels Overkill.  The only way for any of this to ever have worked in practice would have been for advisory firms to operate uneconomically, in relation to their lower-net-worth clientele:  this conveys a disturbing message concerning the regulators' view of commerciality.

We may whine about this state of affairs all we want, but it does not change the crude nature of the choices available to us.  Whilst it is possible that the FCA is reconsidering its method of gold-plating the EU regulations more or less verbatim, in the meantime advisers need to address the implications of those choices, if we have not already done so.  In stark terms they are:

  • provide a 'periodic assessment' for every investment client for whom an advisory firm holds servicing rights with a minimum annual frequency;
  • establish a broadly profitable basis on which such a review may be conducted;
  • if there are clients for whom that cost-basis proves unaffordable, resign from an ongoing advisory role; or
  • bite the bullet and operate intentionally on an uncommercial basis.
In my opinion, that last option is unlikely to provide persuasive appeal to most advisers.  Clearly, there may be instances where one needs to help out a client in a position of some difficulty, and do so on terms that are couched without reference to profitability - but to operate one's ongoing business model on such terms is a short route to a cardboard box under a shop awning.  It also involves a kind of implicit Communism - where our wealthier clients are actually subsidising services delivered to those of poorer means.  That's not the kind of decision which we, as advisers, may ethically make on behalf of those more wealthy clients.  Whilst this appears to be the direction of travel with the EU regulations, it seems incumbent upon us, as financial-planners, to find better and fairer ways of handling such conflicts of interest.

At ValidPath, we have recently completed a re-write of our Guide to Fee-Based Advice.  We're now embarking upon a similar root-and-branch update to our guidance on the provision of Annual Reviews.  Whilst we might deplore the lack of sophistication in the output from Brussels (and, by default, also from Canary Wharf), this does actually provide advisers with an opportunity to define our Annual Review Service in forensic terms, and also to re-engineer our procedures in order to ensure that we are not simply complying by rote, but are actually delivering something of real value to our clients.  The regulators are merely interested in hoops that require jumping through:  we need to have a robust and intentional framework in place which actually contributes to a positive transformation of our clients' financial circumstances.

Kevin Moss, 27/09/2018