With transparency regulation is fast approaching, the wealth management industry has tough questions to answer, writes Matthew Hardeman
Ask any honest wealth manager which area of the industry needs to change most urgently, and the answer you’re most likely to hear is ‘fees’ or ‘transparency’.
They’re about to get it in the form of MiFID II, an EU regulation which comes into effect in January. The European Parliament passed the law in 2014, after transparency advocates (including Gina and Alan Miller, founders of private investment firm SCM Direct and now famed anti-Brexit campaigners) mounted a successful drive to require fees to be disclosed as a single number.
The changes can’t come soon enough for clients: charges are often so diced up and scattered in the matrix of data sent to clients (read: buried) that it’s hard really to know anything through the obfuscation. Try asking a wealth manager for their total expense ratio (TER) — the total that fees should add up to but doesn’t even include transaction costs — and many simply refuse to answer.
‘TER is mislabelled — it’s not a total,’ says Gina Miller. Alan cuts to the chase: ‘Look at a typical manager: say they’re [officially] charging 1 per cent, then they’re buying funds charging an extra 0.9 per cent. That takes you up to 1.9. Then they’re charging 0.4 for custody and admin, which gets you 2.3. Let’s say the cost of buying and selling is another half, and you’re up to 2.8 per cent.
‘All the clients think they’re paying the 1 per cent in the headline — but it’s not 1. It’s 2.8.’
The annual reports given to clients after MiFID II comes into force will be required to show all costs, purchases and sales of funds, as well as client withdrawals or additions. The regulation doesn’t mandate comparability through a singular format, however, so managers can still produce the number wherever and however they like. Clients must also be informed of any portfolio devaluation in excess of 10 per cent on the same business day, and of every 10 per cent fall thereafter.
The regulation has ruffled more than a few feathers — some have complained that the ‘10 per cent’ requirement will be a particularly onerous (and expensive) burden that will leave smaller wealth managers lagging behind the big boys in yet another test of resources, fuelling further consolidation (read: killing competition) within the industry.
The disclosure requirement alone has left some wealth managers at C-suite level squirming in their seats: Spear’s was recently privy to the retelling of a private encounter between a handful of big cheeses in the wealth management world. ‘Why should we have to report transaction fees?!’ the executive said incredulously behind closed doors, bemoaning the highly anticipated law.
Clients are unlikely to be happy when they discover they’ve been paying up to three times as much as they had been led to believe. What will the regulators do if clients decide to band together and claim that they have been the victims of mis-selling?
‘January is big-bang for the fund management industry,’ says Alan Miller. ‘It’s not just the scale of the fees, it’s the fact that people are going to realise they’ve been lied to for years and years and years.’ Watch this space: the wealth management industry could be in for the biggest shock it’s had in decades.
Matthew Hardeman is assistant head of the Spear's Research Unit
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