There has been much written about MiFID II in the run up to its inception on 3rd January 2018 and since. The majority of the commentary has dealt with the requirements and compliance and very little on the practical application of MiFID II and how you may use it for commercial advantage. This blog looks at three specific requirements of MiFID II that you may use for commercial advantage, to improve your relationships with your clients and the value of your business.
Call Recording or Analogous Notes
The regulations state that you must either retain a recording of telephone conversations with clients that lead to a client acting on your advice, or make a contemporaneous note of the conversation. Best practice has always been to make a file note of conversations with clients although advisers have a habit of keeping such information in their heads.
Any analogous or contemporaneous note will reduce the need to rely on your memory and will mean that any member of your staff speaking to the client in your absence will have immediate access to the information. This will deepen your firm’s relationship with the client, will demonstrate to the client that the firm knows its clients and is fully appraised of their situation.
The notes should contain:
Date and time of the call
Location (e.g. telephone, Skype, your office etc)
Who initiated the call
The parties to the conversation
Details of the discussions including any recommendations
Confirmation of actions to be undertaken by the client
Confirmation of the actions to undertaken by you
To further demonstrate your professionalism, you may consider sending a copy of the note to your client for comment, which then becomes the minutes of the meeting and will inform any suitability letter or report you may send in relation to any advice you give during the call or meeting. In addition, it will allow the client to clarify or add any points that they may have missed during the call.
Doing this has the effect of demonstrating your understanding of the issues discussed in the meeting, your understanding of the client’s circumstances and further cements your relationship with the client: deepening the trust between you and your client.
The FCA has said, in relation to analogous notes: this approach will ensure firms do not omit relevant details from the note, providing an accurate and contemporaneous record of the conversation. It went on to say, we expect the note to capture any substantive points raised in the relevant conversation that provide material context and colour to the decision taken by the client. In other words, anything communicated from either the client or the adviser that could influence the client's decision should be captured.
However, we would argue that whilst the regulator has its expectations, this is best business practice and something to adopt to further demonstrate how you are a trusted adviser to your clients.
Suitability and Appropriateness
The concept of suitability of advice is not new but MiFID II brings with it a number of changes to the suitability rules for advice on financial instruments and structured deposits. One of the changes is a clarification that a recommendation to hold a MiFID financial instrument is subject to the suitability rules and will require a suitability report. Another change is that where firms are offering a periodic assessment of the suitability of their advice, this assessment must be carried out at least annually and enshrined in the terms of business.
Financial advisers have had to be mindful of the suitability of advice for as long as there has been regulation, and reviews with clients will focus on changes to the client’s circumstances and the ongoing suitability of recommendations. Neither suitability nor annual review are strange concepts.
What is new is the concept of appropriateness. Where firms allow clients the facility to self-direct their investments, if they choose to invest in more complex products they will need to be subject to an appropriateness test to ensure they fully understand the investment they have selected. This can be done using an automated decision tree and certain answers will direct the client to seek advice if the investment appears to be inappropriate given the client’s investment experience. Many fund managers have developed their own appropriateness tests and you are permitted to rely on them if you choose.
Again, sharing this with your client further demonstrates to them you have considered your duty of care to them, even if they have chosen the investment for themselves. Any conversation as a result of the appropriateness test can lead to further business, referrals and deepens the relationship and trust between you and your client.
Disclosure of Costs and Charges
Regulation has progressively increased the breadth and depth of disclosures of first commission and then your fees to your clients. RDR brought the concept of adviser charging and fees for the advice rather than commission for the product that may result. Under MiFID II, advisers need to disclose all costs and charges that relate to their retail recommendations. These need to be aggregated, and expressed both as a cash amount and as a percentage of funds under management if applicable.
In broad terms, therefore, the following must be disclosed:
all one-off and ongoing charges, and transaction costs, associated with the financial instrument;
all one-off and ongoing charges, and transaction costs, associated with the investment service;
all third-party payments received; and
the total combined costs of these three categories.
These disclosures must also be accompanied by an illustration that shows the cumulative effect of the overall costs and charges on the return.
Consider, how are you going to demonstrate that the costs and charges are value for money, such as any additional support or services that you will provide on a complimentary basis to keep them informed and educated on building and protecting their wealth.
Most clients understand that there is a cost to getting advice, but being able to add value to gain their trust and loyalty is how you create a long-term sustainable business.
When they can see the benefit and genuine care that you are providing they will be prepared to pay for ongoing advice, because you can demonstrate through your service to them that this is an investment rather than a cost.
There may some work to do in the short term but implementing the provisions of MiFID II does make good business sense.