Investment professionals are busily reading the tea leaves of experience in the US and the UK, where legislative elements similar to those of the EU’s retail investment strategy have been put into effect. Finance professionals experienced with such provisions take the view that banning inducements risks leaving money-conscious retail clients unadvised, but that value for money is something that product manufacturers are overdue for thinking about, anyway.
However, as pointed out by Micaela Forelli, the CEO of M&G Europe, the RIS is a “flagship piece of legislation” and “if it’s not this release, it will be another one” that will bring “a significant package for retail investors”.
Get ready
Forelli, speaking at the recent Alfi global asset management conference, encouraged financial professionals to prepare for the eventual arrival of measures to increase retail investor participation.
“I think it will be also prudent that this significant piece of regulation is put on the roadmaps of the change teams or the management change teams.”
The UK has already banned inducements and passed legislation to protect financial consumers’ interests. As a concept, “value for money” resonates strongly in the UK mind.
Lessons learned
The UK also carried out the retail distribution review in the 2000s. In the US, the 1982 Gartenberg vs Merrill Lynch court case still resonates. The experience of financial professionals on the Alfi panel discussion to has led them to extract lessons learned.
“I don’t think that it’s something that we would like to see,” said Rafal Kwasny, a conducting officer at Franklin Templeton, of the UK’s inducements ban, raising the concern that risked decreasing access to financial advice.
In the US, the firm had to carry out peer reviews, hire external consultants, collect a lot of information and produce lengthy reports fo the board. “And basically prove that every product delivers a value to the client,” said Kwasny.
Forcing a rethink
A similar process was carried out at Franklin Templeton for its structure for its Luxembourg and Irish products being distributed in the UK.
“The outcome of that exercise was that the overall cost went down, just pure review of the asset, and the products over there,” Kwasny said, “just forced thinking on the manufacturer side, on ours, but also our peers, and it led to kind of more focused, I think better value products to investors.”
Despite the sense that the industry has been dragging its feet on value for money, Christian Machts, chief administration officer for Europe at Fidelity International, described himself as open to it.
Welcoming value
“I would say we all as an industry would welcome a value-for-money concept. And we have learned a lot as my colleague already said, from what has happened in the UK over the last couple of years.”
He took issue, however, with what he described as a regulatory view that value is about low-cost investments, which he said was an argument for ETFs.
Machts said this view ignores elements such as product innovation, performance like alpha, as well as the quality of service. “It isn’t that easy to say a cheap product is a good product.”
Non-standard investors
He also deplored the tendency of policymakers across Europe to think there’s such a thing as a “standardised investor”. He said this is “definitely not the case.”
“What we need to talk about more is empowering investors, empowering investors and making sure that their individual needs are heard and their individual needs were then reflected in value delivered by product.”
Discussing his firm’s investment into ESG, he pointed out that making an impact on ESG will cost money. He asked how it could be paid for “if it’s not reflected in product pricing.”
Inducements transparent
The idea of banning inducements seemed to particularly aggravate Pierre Jond, the CEO of Amundi Luxembourg. He emphasised that inducements today — he called them “rebates” — are “fully transparent and fully disclosed since MiFiD 2.”
If they were outlawed, he said, banks would focus nearly exclusively on wealthy clients who could pay for advice. The “lower end”, he said, will be encouraged to keep their wealth in savings accounts.
“Today, 40% of the wealth and savings of French and European households are kept in bank accounts and cash. And you ban inducements, just going to stay that way.”
Jond did not speak highly of what he called the “technological advice” from technology fintechs.