This year has seen the long awaited implementation of two major pieces of legislation.
I am not sure ‘long awaited’ by whom exactly, other than the regulators and, whilst their intentions may be honourable, the impact is often just more paperwork and cost.
So far this appears to be the case with the EU inspired Markets in Financial Instruments Directive (known as MiFID II) which is still causing much confusion amongst fund managers and the wider financial planning community, despite having taken effect on 3 January.
There are two main aspects of MiFID II affecting our relationship.
Firstly, a more robust obligation on financial planners and advisers to confirm ongoing suitability of your financial planning arrangements. We already do this through your Financial Planning Review, but it places an even greater responsibility on us to have all of the information we need to make an appropriate evaluation of whether your portfolio remains suitable for you.
We are therefore more reliant on you to provide us with this information through our Lifestyle Assessment, ‘Life Goals’ and Risk Profile Questionnaire documents.
The principal purpose of these documents has always been to provide you with advice to the best of our ability based on complete and accurate information about you, but we now have the regulators breathing down our necks a little more so your help in completing these documents is much appreciated.
The other issue of interest is increased disclosure over fund managers’ fees and the costs they incur in managing their funds, such as dealing fees, charges for research, ‘bid/offer spreads’ (the difference between the price at which shares are purchased and sold), etc.
In theory, this is a positive development as we now have a clearer understanding of how much these charges add to the previously published fund management fee (often known as the Ongoing Charges Figure). These charges have always existed and are neither additional charges nor charges from which the fund management group profits, but it is a little disappointing that it has taken legislation for the fund managers to be pushed into disclosing this information.
Such portfolio transaction costs can be significant with some ‘active managed’ funds, such as Henderson UK Absolute fund (not a fund we recommend, I might add) adding an estimated 0.79% to the previously disclosed Ongoing Charges Figure of 1.06%, a total charge of 1.85% per year.
Portfolio transaction charges are much lower for other funds, such as Vanguard FTSE UK All Share Index having an additional charge of 0.15% for a total charge of 0.23% per year and Vanguard US Equity Index just 0.01% for a total annual charge of 0.16% per year.
However, we have come across funds showing negative portfolio transaction costs and this is where the confusion lies in that there is no standard method for calculating such costs.
Negative portfolio transaction costs can arise due to a positive movement in the price of a share between the time of placing the order and the time at which it is executed. Whether this should be included is subject to debate, but having a negative figure for portfolio transaction costs does not seem realistic.
In summary, therefore, whilst charges are clearly important, comparing funds on charges alone is an inexact science and should be treated with some caution.
Nevertheless, MiFID II has provided some clarity over the opaque effect of transaction costs on investment portfolios, something I have always suspected but was unable to confirm, and this is to be welcomed.
It has certainly resulted in us embarking on re-evaluating the ‘active managed’ funds that we recommend to you within our portfolios to ensure that they continue to serve the purpose for which they have been selected; essentially, offering the potential for added value over the purchase of a ‘passive managed’ fund in all cases.
You are likely to find some fund changes being recommended within your next Financial Planning Review.
By the way, the second major piece of legislation comes into effect on 25 May, the General Data Protection Regulation (GDPR), and you are no doubt being bombarded with notification of changes to data protection procedures and privacy statements from all and sundry.
We are no different and will be in touch with you shortly in relation to this.