The entry into force of Mifid II on January 1, 2018 is causing profound changes in the business models of firms that offer investment advisory services. While the process of transposing Spanish legislation over European regulation is still not finalized, a wide range of firms that provide, irrespective of prominence in their value proposition, advisory services for the investments of their clients, need to use communication as key tool to reposition their business models.
Firms involved in Commercial Banking, Private Banking, Investment Services (Stock Market Agencies, Securities Brokerage Houses, Financial Advisory Companies), Insurance companies, Investment Managers and others, need to convey to the market how their business model achieves efficiency in the generation of income and how they optimize their service to their clients, once they have fulfilled all the requirements of Mifid II.
All this, also taking into account that Mifid II forces firms to make numerous structural changes as well as in the support and distribution models. Such changes require heavy investments in technology, compliance, training and other areas.
Mifid II Requirements
In a recent event on this topic held in Madrid, Ernst & Young summarized the areas in which the firms that dedicate themselves to investment advising must amend to comply with the new regulations:
- Classification of clients and financial instruments: They must meet the new information requirementss to clients to which advising is provided and update the product catalog to include the complex products stipulated by Mifid II.
- Pre-contractual information: Advisors should provide more personalized and detailed information to clients, focusing on the advisory model. They must also implement a new transparency framework in terms of costs and expenses, which implies an increase in systems costs
- Suitability analysis: They must amplify the content of the Suitability Assessment that clients fill out, including their ability to withstand losses and their level of risk tolerance. They must also guarantee an efficient use of internal information to profile clients.
- Advisory models: Advisors should increase the level of detail in the information provieded to the client about their investments, as well as specify the levels of service for each advisory model. Applicable to both independent (the investor has access to an unlimited scope of products and pays a fee for the service, and the distributor does not charge incentives) as well as dependent (the investor has access to a limited scope of products, of which a minimum of 25% belongs to third parties, and distributors receive incentives from producers to sell their products) advisors.
- Incentives and remuneration: The independent advisories, therefore, must adapt their income model to a scenario without incentives for product sales and must extend service quality standards to retain the large clients for which they can charge the highest fees for the provision of advisory services.
- Conflicts of interest: They must adopt measures to prevent conflicts of interest in investment recommendations, which entails amplifying analysis tools and information so that clients know in depth the criteria in selecting of products, markets, asset managers, etc.
- Product Governance: Advisors must implement product approval procedures for commercialization and supervision by the administrative bodies of each entity.
- Training requirements: Mifid II introduces greater training requirements to investment advisory firms. Therefore, they must determine how to put these requirements into practice internally, developing new training plans and requiring their certified professionals to accredit high levels of knowledge and skills in finance.
- Record of conversations: Each entity must record all face-to-face meetings with clients, and record them on platforms that facilitate storage and easy access for the supervisor for their subsequent control.
- Other obligations: Advisors must update the risk and control maps required by the Mifid II directive; they must strengthen the analysis of customer complaints and claims to detect non-compliance risks and review collaboration agreements with third parties.
Keys to communicate positioning
In conclusion, specialized advisory firms need to use financial communication services that help reposition them in a way that further highlights their differential qualities and that takes into account the change processes they have implemented and the subsequent result.
To this end, communication can support them in making known the advantages created by the structure and the chosen service model, selecting those aspects which can contribute greater added value to the brand:
- Income stream and incentive fees models, depending on the advisor type chosen.
- En el caso de las Empresas de Servicios de Inversión, formato más óptimo para aportar dicho servicio de asesoramiento: Sociedad de Valores, Agencia de Valores, Empresa de Asesoramiento Financiero.
- For Investment Services firms, the most optimal format to provide such advisory service: Stock Market Agencies, Securities Brokerage Houses, Financial Advisory Companies
- Inversiones en tecnología realizadas para adaptar todos los requerimientos en información al cliente, cumplimiento regulatorio, y seguimiento de los niveles de calidad de servicio.
- Investments in technology made to adapt to all the requirements regarding information provided to clients, regulatory compliance, and monitoring of service quality levels.
- Continuous training plans for professionals to evaluate their excellence.
- Expectations of business growth based on the specific service model of each firm.
Javier Ferrer
Director of Financial Communication at Proa Comunicación, enthusiast of the investment realm and expert in communicating business models supported by financial advising and asset management