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Day of the MiFIDs

By Justin Modray, published 06 January 2018.

From 3 January 2018 some new rules came in to effect via the EU’s second Markets in Financial Instruments Directive – called MiFID II - mostly affecting fund managers and financial advisers.

A lot of MiFID II is really boring stuff, but there are some interesting bits which will force both fund managers and advisers to be clearer about charges.

Fund managers can no longer receive ‘free’ research from brokers in exchange for using that broker to place deals for their fund. Managers must instead pay for the research and then either swallow the cost themselves or charge it to their fund. We would expect the net position to be broadly similar since any sensible fund manager would negotiate lower dealing fees to compensate – time will tell. Managers also have to give an estimate of how much their fund transaction costs (i.e. buying and selling shares) total each year, previously a ‘hidden’ cost simply reflected in fund performance.

Advisers will need to show their own fees, as well as those for any underlying funds and investment services, products or platforms used, both at outset and annually. And crucially this will need to be in pounds as well as percentage terms. Where advisers charge ongoing fees they will also now have to review their advice with each client at least annually.

This is a very significant and positive change for an industry that has a reputation for sweeping costs and ongoing service under the carpet.

Compelling advisers to spell out in pounds and pence how much their investment advice is costing will be a rude wake up call for many investors, especially since advice charges have generally rocketed in recent years. Following the sales commissions ban at the start of 2013, many financial advisers have effectively doubled their annual fee from 0.50% to 1.00%. Add in market growth and some advisers could be earning up to three times more than they were just a few years ago.

The new rules will make little difference to us, since we’ve always been upfront about charges and shown them in pounds and pence to potential clients. And as we’re very focussed on keeping costs low we’ve nothing to hide. But we believe these changes will have a big impact on the advice industry over time, as an increasing number of investors wake up to just how much they’re paying for financial advice and the other associated charges.