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“Breaking up is hard to do” and MiFID2

by on 25·09·2018

"Breaking up is hard to do" and MiFID2

The answer to who sang it is at the end.

What has a break up got to do with MiFID you might be asking and why am I writing about it?

I was chatting to a firm recently who said that they were having difficulty in explaining to clients why they could no longer look after them as they had in the past. This was exacerbated due to the emotional attachment the firm and its advisers had with clients who had been with them for years. An old client couldn't understand why her adviser still couldn't pop round any more for a couple of hours for a chat and a cup of tea and sort out all her paperwork as he had over the years.

When she asked why, they had to explain that the £100 a year they received from her no longer even covered the cost of providing the annual review. Because she didn't want to take up the offer of paying a greater fee for the service they would sadly have to disengage as they would be losing money.

The consequence of MiFID is that if you take a fee for providing a service you have to provide that service or refund the fee. Quite straightforward really and fair to the client, the rub comes when advisers and their firms work out the real cost of providing that service in a post MiFID2 world.

We are dealing with firms who have already realised and acted or are currently processing the data to establish the true cost of providing just an annual review for a client.

It's evident from discussions with firms that the administrative time spent on completing a MiFID2 compliant review with an Interim Suitability Report is certainly in the region of 6 to 10 hours work. This is without adding in the adviser time coupled with the cost of travelling and the time spent in the client meeting, particularly if the client doesn't come to see you.

Our feedback confirmed by firms is that the real cost to the business is at least £500 to £1000 per client to carry out an annual review. This is an eye watering amount and is a reflection of where the industry is now and the pressures on firms and clients.

Quite clearly if you are only receiving a fee of say £100 or £200 per annum from the client you are losing a substantial amount of money every time you do a review.

You as a firm need to make a profit, and MiFID2 is driving a wholesale review of service agreements, costs and charges that firms apply to its clients. Firms are now acutely aware that they have to have a profitable charging structure which reflects the true cost of providing the service that they charge a fee for.

Clearly without this firms will run into difficulties, hence;

We are aware of firms who have already disengaged with thousands of legacy clients as they are unable to break even with them, let alone make a profit. Very few who were offered the opportunity to take up a new service agreement and pay more to retain the service opted for it.

This is sad, as it demonstrates some of the unintended consequences of RDR and MiFID: more and more of the public can't afford ongoing financial advice and have become disenfranchised.

The time and resource now being taken up by MiFID client reviews has also placed a strain on the administrative support within firms. This is due to the increased workload in producing and reconfirming all the elements within the Interim Suitability Report for a MIFID compliant review. The side effect of this has stifled growth and new business for a lot of companies. The majority of their time and resource is spent on servicing clients.

From our perspective this has also led to a debate within firms over the merits of doing client reviews "inhouse" or outsourcing the production of the reviews.
Outsourcing is allowing firms to free up capacity to take on new business and grow the firm. It takes out the strain and pressures of constantly having to ensure reviews are done and are on time.

In effect we are farming the existing clients for you or as one firm put it, you are mowing my lawn for me to stop it turning into a jungle. This frees me up to grow the business without worrying about my existing clients.

If you'd like help dealing with legacy clients or producing client reviews, please contact us and feel free to download the brochure regarding our client review service.

Well done if you knew it was Neil Sedaka.