FECIF Board Member & ANASF Executive Committee Member
We need new market propositions not unnecessary bans
The final date for the transposition of MiFID II in each Member State – January 3rd 2018 – is fast approaching. Is it possible to see some initial insights into the industry, in order to foresee the impact of the Directive on business models? In particular, the Directive entails a Hamlet-style dilemma: independent or non-independent investment advice?
Let’s take the case of Italy. This crucial question was discussed during ConsulenTia, the convention organized by Anasf in Rome each February. Over 2,500 professionals (mainly financial advisors) attended ConsulenTia 17, where the main issues debated was MiFID II. During the ensuing round table session, the CEOs of the main national intermediaries that specialise in the provision of financial advisory services clearly stated their position; Italian banks, investment firms and insurance companies intend to keep their traditional business models, i.e. commission-based remuneration and the provision of advice on a non-independent basis.
No news, good news? Absolutely not. The transposition of MiFID II will not create an utter disruption of business models, but indeed their enhancement; this will translate into greater transparency and quality for customers (let’s take, for instance, the new requirements concerning the provision and reception of inducements in commission-based distribution models). In this regard, the fundamental question does not concern the choice between independent or non-independent investment advice. The challenge is completely different and more important from the point of view of investor protection; will it be possible to conceive new business propositions aimed at those citizens who are currently not assisted by financial advisors? In this sense, the industry convened in Rome clearly expressed the intention to take up this challenge. The key to achieve this goal will be the ability to convey market propositions focused on a revolutionary idea - a full range of services, encompassing both financial and non-financial advice (for instance: tax, wealth, pensions, insurance, and loans).
In this new scenario, the role of financial advisors will continue to set a milestone in providing effective responses to consumers’ needs and expectations. From this point of view, the relationship between each investor and a financial advisor represents an “intangible asset” the value of which needs to be preserved within the MiFID II context. Therefore, it is not possible to accept the new rule established by the MiFID II delegated regulation, whereby it prevents the same advisor from providing both types of service (that is, on an independent and non-independent basis). This ban would not help protect investors and may even prejudice the aforementioned relationship of trust, especially in the case of comprehensive and long-term advisory services. Indeed, such a ban would create a series of unintended consequences.
First of all, there is the risk of creating a forced segmentation of the market; due to client self-selection, it is likely that affluent clients and high net worth individuals would only deal with advisors working on an independent basis, thus significantly restricting the market potential for this type of service. This could result in an increase in the cost of services provided on an independent basis, thereby excluding mass-market clients from this type of service.
Secondly, it is likely that, with regard to advice provided on a non-independent basis, the same advisor would have to serve a larger number of investors, with less time and attention to devote to each client.
Thirdly, the ban set out in the delegated regulation would also require financial intermediaries to develop two different networks of advisors if they intend to provide both types of financial advisory services. Specifically, due to the increased organisational costs, it is likely that small investment firms and their advisors will not be able to provide advice on an independent basis, once again to the detriment of market development.
Ultimately, the ban envisaged by the delegated regulation entails the risk of accentuating the advice gap in the national market – a serious problem, and potentially common to all European countries. In this regard, ConsulenTia 17 struck the real point: investor empowerment does not require the introduction of unnecessary bans, but the achievement of new market propositions, focused on the quality of the service.