Lessening the burden of regulation

The burden of regulation hangs heavily over the world of financial services, and with the introduction of yet another swathe of rules under MiFID II in January this year the demands on adviser time is only set to grow greater still.

With the dust barely settled on the changes mandated by the Retail Distribution Review (RDR), advisers face jumping yet more hurdles in their attempts to advise and manage client investments effectively, and within the law.

The European MiFID II rules have increased levels of transaction reporting, added to investment research rules and imposed extra layers of disclosure regarding best execution, all of which are expected to result in one-off and ongoing costs which are unlikely to be passed down to clients.

In times like this, delegation has obvious benefits. Around 64% of advisers that had adopted a DFM structure in the recent Rathbones’ Value of DFM report admitted they needed the external guidance and regulatory support offered by the external investment manager to meet the challenges of the likes of MiFID II.

With suitability, best execution, transaction and research costs as well as client communication all under the regulatory microscope, the market for advisers is becoming ever more complex and complicated. Dealing with the mechanics of regulation in-house becomes completely inefficient when an adviser attempts to administer a host of investment management propositions for clients.

Ultimately the pay-off for the work and resources put into meeting the rules is just not worth it. There is the risk advisers begin fixating on costs, and costs do not equal value for end clients.

A DFM has the time, the expertise and the products to help with the challenges posed by regulators.

More importantly they have the understanding and the resources needed to meet regulatory demands. A startling finding from the value of DFM report demonstrated some confusion about what MiFID II entails and which party should hold responsibility for assessing suitability of certain services.

Three-quarters of advisers (75%) said they expected their DFM to start producing quarterly statements. A further 66% said they wanted their investment partners to write to them if a client investment portfolio falls by 10% or more.

There is also some confusion over who is responsible for which parts of the investment process. Advisers are split on whether it is their role or the role of the DFM to manage the suitability of an investment mandate. Just under half 49% said it is the responsibility of the adviser, and 43% believe it is up to the DFM. More than a third (34%) of advisers still thought investment performance was their responsibility, with 23% stating it fell under the DFM’s remit.

However, advisers are almost unanimous in agreeing that it is their role, not a third parties, to assess the initial and ongoing suitability of a product.

While few could argue with the aims of MiFID II, from increasing transparency and investor protection to reducing market abuse and improving market efficiency, the layers of demands placed upon both advisers and DFMs are heavy. External investment managers are likely to be hit with the biggest overheads in the bid to tackle ongoing issues of suitability and transparency within client portfolios, while advisers face increasing demands on their time in assessing suitability of a product or service.

The relationship between an adviser and an experienced DFM with sophisticated resources behind it could prove invaluable as the regulatory burden undoubtedly grows over the coming years, finding the right way to work together, for the benefit of clients, will be key for both sides.