The entry into force of Mifid II on 1 January 2018 is causing profound changes in the business models of entities offering investment advisory services. In a process of transposition of Spanish regulations to European regulations that has not yet been finalised, a wide range of institutions that provide, to a greater or lesser extent in their value offer, advisory services for their clients' investments, need to use communication as a key tool to design a new positioning of their business model.
Commercial Banking, Private Banking, Investment Services Companies (Securities Agencies, Securities Firms, Financial Advisory Firms), insurance companies, asset managers, and others, need to communicate to the market how they have managed to make their business model efficient in revenue generation, and optimal in customer service, once they have complied with all the requirements of the Mifid II regulation.
And this, taking into account that Mifid II requires numerous structural changes, as well as changes in service and distribution models. Changes that require heavy investments in technology, compliance, training and other areas.
Mifid II requirements
At a recent event on this issue in Madrid, Ernst & Young summarised the areas in which investment advisors need to intervene to comply with the new regulation:
- Classification of clients and instrumentsThey must comply with the new obligations to inform professional clients to whom advice is given, and update the product catalogue to include those complex products covered by Mifid II.
- Pre-contractual informationThey must provide more personalised and detailed information to customers, with a focus on the advice model. And they must implement a new framework of transparency in terms of costs and expenses, which implies an increase in the cost of systems.
- Suitability analysisThey should broaden the content of the Suitability Test that customers fill in, including their loss bearing capacity and risk tolerance level. And they should ensure efficient use of internal information to profile clients.
- Models of counselling: They should increase the level of detail in the information provided to clients about their investments, as well as specify the service levels of each advisory model. Both the independent (the investor has access to an unlimited universe of products and pays a fee for the service, and the distributor does not charge incentives); like the dependent (the investor has access to a limited universe of products, of which a minimum of 25% is from third parties, and the distributor does receive incentives from the manufacturer for selling its products).
- Incentives and remuneration: Independent advisory firms must therefore adapt their revenue model to a scenario without incentives for product sales, and must raise service quality standards to retain the large clients who can generate the highest fees for the provision of an advisory service.
- Conflicts of interest: They should adopt measures to prevent conflicts of interest in investment recommendations, which entails increasing the tools of analysis and information so that clients are fully aware of the criteria for choosing products, markets, managers, etc.
- Product governanceThey should implement procedures for approval of products for marketing, and for oversight by the management bodies of each entity.
- Training requirements: Mifid II introduces higher training requirements for investment advisors. They must therefore determine how to implement these requirements internally, developing new training plans and requiring their certified professionals to demonstrate high levels of financial knowledge and skills.
- Recording conversationsEach institution should record all face-to-face meetings with clients and record them on media that facilitate storage and easy access by the supervisor for subsequent monitoring.
- Other obligations: They should update the risk and control maps required by the Mifid II directive; strengthen the analysis of customer complaints and claims to detect risks of non-compliance; and review their collaboration agreements with third parties.
Keys to communicating positioning
In conclusion, specialised advice providers need to use financial communication services to help them build a new positioning that deepens their differential qualities, and that takes into account the change processes they have implemented and their outcome.
To this end, communication can support them in disseminating the advantages generated by the structure and the chosen service model, selecting those aspects that can bring the greatest added value to the brand:
- Income and incentive charging model depending on the type of consultancy chosen.
- In the case of Investment Services Companies, the most optimal format for providing this advisory service: Securities Company, Securities Agency, Financial Advisory Company.
- Investments in technology made to adapt all requirements in customer information, regulatory compliance, and monitoring of service quality levels.
- Continuous training plans for professionals to assess their excellence.
- Expectations of business growth depending on the particular service model of each entity.
Javier Ferrer
Financial Communication Area Director Proa Comunicación, passionate about the world of investments and a specialist in communicating business models based on financial advice and wealth management.