More is less
2018 is only a few weeks away. I suspect it will be quite a challenging year; starting with PRIIPS on January 1st and MiFID II on January 3rd. I have no idea why the dates differ. Actually, the more I look at these new EU regulations, the more I am convinced that the teams that created them didn’t speak to each other. And whilst the objectives of both are sensible I doubt that 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 does contain some requirements which will provide more clarity and visibility regarding fee disclosure and these will create opportunities and challenges for financial advisers. I think some firms may choose to re-consider their existing fee models; maybe by a structure which contains both basis points fees plus financial planning fees at fixed costs, project costs, hourly rates or whatever. This may be more complicated than a “one size fits all” approach but the increased disclosure requirements may drive a need for advisers to demonstrate value more explicitly.
The rumours that 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. However; I think some firms will choose to tape meetings and calls for a number of reasons. First; it saves time, second; phone apps are being developed such that they 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’m not convinced that the new Key Information Document (KID) is fit for purpose if that purpose is to better inform consumers. The reality is that the more pages that are 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 that 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, The Senior Managers Review and the Platform Market Study; the last a truly comprehensive and detailed piece of work requiring significant resources to complete and heavens knows what resources to analyse. But to be fair, the size and complexity of the platform market deserves a “drains-up” review; if only to provide the FCA with a thorough understanding of the propositions and financial dynamics.
Apart from regulation, the 2018 highest profile issue will be DB to DC transfers. On the positive side; excellent, possibly life-changing outcomes, for many consumers, substantial fees for financial advisers and record sales for product providers. On the less positive side a wide ranging FCA market study might confirm the unsuitable and unclear consumer outcomes that emerged from their initial small survey and lead to a miss-advising scandal down-stream. The remediation process has already been announced and the costs of miss-advice will be substantial.
Another important issue will be “The Market Correction”. I predict that this will happen in May. I can say this confidently because if it does actually happen then I will write a best-seller on how to predict markets. And, if it doesn’t happen in May, hopefully, no one will remember this article! But on a serious note – not unconnected with the pension transfer issue – a significant correction is a clear possibility in 2018 and will spook most clients in drawdown. I suspect that managing expectations has never been more important than now.
I hope that in 2018 we see 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’m 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 on line or over conventional telephony; and third, I think that banks are likely to become serious competitors in this space. Not least because they already have the customers.
It seems to me that the underlying theme in 2018 will be consolidation. There are still about 2000 financial adviser 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. In the asset management space, we are likely to see some consolidation of and I think the results from the Asset Management Review will hasten this process.
The desire of providers to get closer to customers will also continue. When I say “customers” I am using the vocabulary of some 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 pensions freedom, the DB to DC transfer market, and the ever-growing number of “at retirement” consumers looking for help as they make plans for the rest of their lives.