MIFID II costs and charges disclosure

Hello all


I am just looking for some feedback on what people are doing (doing differently) following MIFID II regarding disclose in reports.

We mainly use Parmenion, Standard Life and Nucleus. When using SL and Nucleus we have model portoflios run by the same DFM specific to our firm.

Parmenion have updated their pre sales documentation for MIFID II, Nuclues and SL have not done so yet although I think SL have their technology upgrade this weekend. It has been difficult not knowing what SL and Nucleus are going to produce.

We have updated our fees and charges section in our reports but I'm not 100% happy as I feel we are having to feel our own way around this.

We have a table which shows in £ and % the following:

Adviser remuneration

Platform / custody costs

DFM costs

then in a seperate section

fund OCF

fund trasaction costs - for the DFM models we have used a spreadsheet and aggregrated the transaction costs data having obtained this from FE

Then at the bottom it is all aggregated in £ and %

We then have a second table which shows the effect of charges on investment returns. We have assumed an invetsment return of 5% and we intend to use same rate for different risks to ensure consistency (Thoughts??) we are showing the £ amount after 1, 2 and 5 years based on 1. return of 5% without any charges and 2. 5% less the charges (based on what we have worked out as the aggregated charges in the first table).

It is all built around spreadsheets and simple formula so can be produced reasonably easily and saved on client file.

I am aware though that Parmenion are assuming 0% growth when they show the effect of charges. Different providers may chose diferrent approaches to details suchs as growth rates, time periods over which the effects of charges are shown. And these could differ from ours.

Any feedback / input gratefully received.

Should to mirror what providers are doing or have a consistent approach to all our clients?

Would it be better to signpost to provider documentation and not include in Suit Let?

Should we rely on our own spreadsheets?

I am happy to take the converstaion 'off line' if anyone wants to exchange/swap ideas in more detail what they are doing.


Many thanks,

«13

Comments

  • Hi Hannah

    What a cracking first post! I'd say you have it pretty well sorted there. The FCA knows about the problems we all are having with this and expect to see a 'best endeavours' approach to compliance with what is a really horrible bit of MiFID II. 

    How do you think it looks in the report? Is certainly sounds fair and not misleading, is it clear? If you have something that you think looks good and can be provided consistently to all clients, then I'd vote for that every time. However, what I think you should be doing is compiling the data from the platforms into your format. It shouldn't be the case that the client sees your table of costs and then a different set of numbers in the platform illustration. Of course if the platforms aren't giving you that data then until they do what you're doing sounds good to me. The issue you raise about different growth rates adds to the pain of compiling data from different providers too.

    Standard Life put out an email really early in the year that showed what its disclosure was going to look like when they do deploy it. If you get the platform emails have a look back to the first week in January, I think it was called a CID?

    I know it's not a view that we have consensus on around these parts, but I work on the basis that DFM model portfolios are NOT subject to the same disclosure requirements as PRIIPs. That is to say, if you are running a model portfolio in house, you need all the OCF and transaction cost data for each fund. This is because you are advising on each change and getting up front permission, with full suitability each time. But if it's operated by a DFM, especially with an 'agent as client' agreement, you don't need it. You can't, because the whole portfolio could change tomorrow without the client's prior explicit approval of what funds are being selected and without the DFM having to get it.

    If you're aggregating the DFM costs at the point of advice that's great, but it's a step further than you need to go IMO. I wouldn't stop doing it, but how often is that transaction costs spreadsheet in FE updated? Who does it and how long does it take them? Also, back to my earlier point, is the client going to see a different set of numbers in the platform literature?

    If you want to chat the DM me, I'm always happy to add to the confusion!


    Benjamin Fabi FPFS
    Chartered Financial Planner

    http://twitter.com/benjaminfabi 
  • Hi Hannah

    I have been working closely with our MIFIDII implementation guy and have been responsible for coordinating the delivery of the ex ante cost disclosure. Fortunately I am not dealing with the ex post disclosure which looks as if it is going to be horrendous .

    From what you say, it looks like you are delivering as expected. The only difference with our process is we show costs in year one and subsequent years, and then the impact of charges in year one and two.  We have assumed 5% growth too, the 0% growth figures, which appear to be perfectly acceptable, aren't really in the spirit of things in my view.

    We have an in house DFM, which is used by some third parties, so have had to get something up and running. Fortunately, these are model portfolios which has simplified things somewhat but we have still had to produce MOAS (the mother of all spreadsheets, columns A to QI) which is based on something we got from TISA so uses the "industry" formula to calculate the charges. This includes calculating cash flows on a monthly basis (they did suggest this could be done daily!) and then a rather odd impact section which seems to bear little resemblance to the cost disclosure, much like a reduction in yield.

    In our reports we split out the fees in one table to show costs of advice, investment management, custody, funds, transactions etc. We then do a second cost disclosure as an appendix/ standalone letter which is the MIFIDII compliant version. This is more general and breaks down the service costs and product costs.

    Happy to share the cost disclosure letter but would get lynched if I shared MOAS!

    Cheers

    Tom




  • Hi Hannah

    We've been doing a similar table to you in the suitability report, but probably keeping it a little simpler. We've then been backing that up by using the specific tool AJ Bell have built that spits out a standalone costs and charges disclosure report we include as an appendix.

    I agree with Ben the important thing is to make sure all your figures are consistent across report, illustration etc.

    Jonny
    Jonny (paraflex)
  • richallumrichallum Administrator
    @parawhat got a link to the AJB tool please?

    Paraplanner. F1, Apple, Nutella, ice cream. No trite motivational quotes. Turning a bit northern. Republican.

  • For the effect of deductions FE has a new RIY tool that it is letting some people use that might be useful.  Just playing with it at the moment.  It lets you use an actual portfolio you have on the system, tells you the five-year annualised gain and OFC (but not transaction costs atm). 

    Just trying to do some ex post disclosure for the first time and not sure where I'd be without FE right now, probably drunk in a hedge somewhere gently rocking from side to side.
  • Can we add attachments on this forum? I'd quite like to show you the solution we've made for this (excel). Mostly so you can tell me where it's wrong!
  • richallumrichallum Administrator
    Hit the highlighted file icon or just drag a file in


    Paraplanner. F1, Apple, Nutella, ice cream. No trite motivational quotes. Turning a bit northern. Republican.

  • Here we go!

    It's designed for our default model of one investment solution across a number of products. That solution is most commonly a DFM too. 

    It allows for up to 3 products although it wouldn't be too hard to add more.

    The 2nd tab is 'on brand' so ready to copy into a report.

    The formula will work out compounding for 365 days of the year (rather than add net growth on effectively day 1).

    Critical analysis welcomed. It's been widely accepted here, so I worry that i'm now the fall guy if it turns out to be wrong!
  • Aron, thanks for sharing. xx
  • Hi,

    Has anyone come across a tool which caters for ongoing regular premiums? Everything I've seen so far is based on current valuation and assumed growth but no where for regular premiums to be included, thanks.
  • Rebecca_TuckRebecca_Tuck Member
    edited March 2018
    I love a good spreadsheet, especially with input AND output tabs!

    Thanks for sharing - I will have a play, see what it spurts out compared to what we're currently doing, then feedback :)

    Side note: Do you use three-sixty? Your output looks incredibly similar to the recommended layout in this week's regulation update (though theirs just talks you through the calcs, rather than actually doing them) so I think that's a good start!
  • Hi @arongunningham - I've had a play with a one-off investment of £200k, running the same info via a Transact illustration, and there's a couple of things I wouldn't mind checking with you?

    - it looks like there's a cell referencing error on the output for year 1 transaction costs (doubling up the OCF line)
    - it doesn't seem to be taking off initial service costs off before any ongoing investment/product costs are calculated (including year 1), so these are coming out a bit high.
    - are the annual investment costs based on the initial value, with no allowance for growth? The monetary costs on the illustration are coming out higher, so maybe that's taking some investment growth into account too? (Speculating here - I think I need to check with Transact where their figures come from too!).
    - I think some of these points are probably having an impact on the RIY figures, but equally Transact's looks like it's cheating somewhat (remarkably round numbers), so I'll check on that as well.

    Where products 2/3 don't exist I'm putting in a penny to stop it throwing a wobbly, but that seems to be working well enough. Aware I'm probably making very little sense, so happy to send the illustration/populated spreadsheet back across so you can see what I'm on about! Looks like it'll be great with a couple of tweaks :) nice work!

    Ta,

    Becca
  • Hi @arongunningham - I've had a play with a one-off investment of £200k, running the same info via a Transact illustration, and there's a couple of things I wouldn't mind checking with you?

    - it looks like there's a cell referencing error on the output for year 1 transaction costs (doubling up the OCF line)
    - it doesn't seem to be taking off initial service costs off before any ongoing investment/product costs are calculated (including year 1), so these are coming out a bit high.
    - are the annual investment costs based on the initial value, with no allowance for growth? The monetary costs on the illustration are coming out higher, so maybe that's taking some investment growth into account too? (Speculating here - I think I need to check with Transact where their figures come from too!).
    - I think some of these points are probably having an impact on the RIY figures, but equally Transact's looks like it's cheating somewhat (remarkably round numbers), so I'll check on that as well.

    Where products 2/3 don't exist I'm putting in a penny to stop it throwing a wobbly, but that seems to be working well enough. Aware I'm probably making very little sense, so happy to send the illustration/populated spreadsheet back across so you can see what I'm on about! Looks like it'll be great with a couple of tweaks :) nice work!

    Ta,

    Becca
    Hi,

    Thanks for the reply, can you post the spreadsheet with the data filled in (minus any personal info). I couldn't quite follow where the errors are.

    Cheers
    Aron
  • Hi Aron,

    I've (hopefully) attached some calculations for "Joe Bloggs", plus the Transact illustration for comparison.

    Version 1 shows the full £200,000 investment and Version 2 has deducted the initial fees off the top to correct the ongoing charges - I've highlighted the query in the output table on both re: year 1 transaction fees.

    I hope this clears up my previous comment, but happy to chat through it on the phone if I'm still not making sense! 

    Thanks,
    Becca (01656 760 670)
  • Hi,

    Here we go, I think I've fixed most of those points - thank you for pointing them out.

    The initial costs was a brain-fart on my part, for sure it needs to come off on day 1. I couldn't work out how to automate that part, so you have a box where you need to enter all the Day 1 costs (mostly adviser fees i guess).

    The table on the output had an error where it was referencing the wrong field.

    And I got rid of the some of those #DIV/0 errors so now you don't need to put in £1 or something.


  • @arongunningham It's looking very good now. 

    To get the figures to match the Transact illustration in @Rebecca_Tuck 's example, you could use the Rounddown formula and set it to -3 to get it to 3 significant figures. That's maybe as a sense check more than anything else.

    Jamie
  • Good spreadsheet Aron.

    Interesting that you're amalgamating multiple products into a single table. Any reason for this as we've taken the approach to do a separate table for each product (e.g. each ISA, GIA, SIPP)? I'd assumed (perhaps wrongly) that the amalgamation was at the product level rather than the client level. 

    For anyone who's not seen the output from the AJ Bell tool I've attached a Joe Bloggs example. The tool's still a bit glitchy and I really don't like the way they amalgamate initial and ongoing costs into a single summary table rather than splitting between 1st and subsequent years - can give very misleading results.

    Our approach is as follows:

    1. Use AJ Bell tool to produce costs and disclosures report to obtain the initial and transaction/incidental fund costs we couldn't otherwise get easily.
    2. As we don't think the AJ Bell report is particularly client friendly, we include it as an enclosure to the report to satisfy disclosure requirements, but we also include a table in the suitability report that summarises the costs in a more client friendly manner.
    3. We pull out the figures from the AJ Bell report and use these to populate the illustration. This makes sure all the figures match.

    Jonny
    Jonny (paraflex)
  • benjaminfabibenjaminfabi Moderator
    edited March 2018
    That output is interesting @parawhat in that you don't get an RIY in the effect of charges table. I'm with you on client (un)friendliness too. 
    Benjamin Fabi FPFS
    Chartered Financial Planner

    http://twitter.com/benjaminfabi 
  • Hi all,

    I’ve spent a bit of time over the past few weeks reviewing how we disclose costs and charges in our suitability reports so this post has been very timely and extremely useful. I also have to say that it exemplifies everything that’s great about paraplanners, so keep up the good work everyone.

    However, before you cast your discerning eyes over the fruits of my labours, I just wanted to raise a few general points for your contemplation.

    1) It is clear that there is no set, or single best way to present this information. Even the providers can’t agree on a standard approach. 
    2) Questions need to be asked over the accuracy of some of the data being provided e.g. transaction charges.
    3) Using different assumptions about growth rates or methodology for the calculations can produce quite different results.  
    4) I strongly believe in empowering people and would always advocate transparency. However, I do think there is a real danger that the presentation of this costs and charges data could end up getting over-engineered, and actually prove counter-intuitive for the person who really matters - the client.
    5) We’ve been told for the last x years that suitability reports need to be shorter, and we shouldn’t regurgitate information that can be found elsewhere. Again, I worry that we could end up turning over a page of the suitability report to a regurgitation of the costs and charges disclosure that’s already included in the client’s illustration.

    We have always tried to make the costs and charges disclosure in our reports as clear and easy for the client to understand as possible. We also take a granular approach i.e. costs and charges are summarised at a plan level - we have found this to be particularly effective when recommending replacement business, where a comparison of the charges of the existing and recommended new plan is needed. It is also possible to drill down further and show the charges of each fund that makes up the recommended investment strategy; and separately highlight the cost of the adviser’s advice and service, which is particularly useful where the client is paying an actual fee.

    So in the spirit of sharing, I’d welcome your thoughts and comments on the attached. The aggregated total charges are automatically calculated and take into account the total amount being invested in the plan over the next 12 months (including regular contributions).

    Thanks,

    Ed
  • @parawhat ; I don't know if it's necessarily 'per the rules' to lay out the table the way we have, but my personal view is that we're a) trying to keep it all understandable for the client, and b) we are providing 'the solution' and this, overall, costs x. We have kept all our workings (like the spreadsheet) so nothing's lost.

    Rather than initial and ongoing, we have first year and subsequent years. I don't know if this is wrong or contrary to other people's views? That would be the most contentious part of my output -- you can't explicitly see the initial charges in isolation. Something to think about.


    @edevan5 That's pretty good. I know you have a particular challenge of trying to please everyone.

    What I notice is that it doesn't show the overall cost. My view would be that the client is likely to want to know the overall cost, the ultimate bottom line for what we're recommending. (this follows on from @parawhat's point).

    Besides at the bottom of my table, I also have a headline at the top of the charges section;



    Followed by the table. 

    There's also not a cumulative effect of charges - is that not mandatory?
  • The attached screenshots (which are the wrong way round!) from the ESMA Q&A document show the highest level of aggregation required in a SR.

    This is covered on COBS, from COBS 6.1ZA.11 onwards (notably 6.1ZA.14 and within that 50(10))

    I think that if you are using a platform only, and that platform is producing numbers in the illustration that comply with the requirements in 50(10) above, then as long as it has your ongoing advice charges you're all set for ex-ante. Any additional aggregation you do for say, ISA, SIPP and GIA in the SR is cosmetic. It's the illustration that's hitting the requirement of MiFID and that needs reference in the SR.

    As far as ex-post is concerned I don't think it's possible to comply with the rules. Nathan Fryer and I have spoken about this since the howwow and I for one ended up with a lot of scratch marks on my head!

    We are all really over-engineering this I think, and in my opinion the FCA needs to stop with the 'best endeavours' line and step into this vacuum and give everyone some clarity so we can all get some time back. There are loads of different compliance firms, all telling us how to do it differently, and platforms producing different outputs from the same inputs. And at the end of that is the paraplanner, trying to implement it in a way that doesn't take hours!

    That said, I think it is great that in the absence of FCA guidance and in the face of an avalanche of different interpretations and materials, we are here, trying to sort it out as a collective. Go us!



    Benjamin Fabi FPFS
    Chartered Financial Planner

    http://twitter.com/benjaminfabi 
  • Thanks @benjaminfabi ;

    Our solutions are 99/100 utilising DFMs. We've found them to be woefully unprepared for MIFID II.

    Therefore, without proper '50(10)' investment proposals, we've taken to including some of that data off our own back. The cumulative effects of costs are calculated by us ex-ante (year one) and expected ex-post (subsequent years).

    I think it just about shows we're trying our best. I know for sure that other firms aren't going to this length to get it right!

    Like you say, when you get to the end of the first year and ex-post needs to be factual, another impossible task we're faced with. Currently we can only see to outly the charges in the normal way we would 'you pay 1% and this £x is 1% of the current value'... which is wrong, but....


  • We are quite small, only look after around 40 clients, so all of this manually calculated disclosure is about manageable (its taking me away from GDPR atm but that's another headache).  How on earth are firms with 1,000's of clients coping with the ex post disclosure?

    I did 9 the other day, usually we would send an invoice with exactly how much we have been paid and any balancing payment owed to us; takes a morning to do.  Took me nearly 1.5 days to do it with the ex post included (I might speed up once I've got my flow on but still).  With no automated information through either a back office or platform, what are the big companies doing?


  • All (if any) of the providers may not be there yet, but in terms of ex-post reporting surely given time they'll be able to provide accurate costs and charges in monetary terms for each plan broken down into the different elements for the past 12 months wont they?

    The issue I can't get my head around regarding ex-post charges reporting is what's going to happen when a client has multiple plans on and off platform, and with different providers, as they will invariably provide their ex-post costs and charges disclosure at different times throughout the year. However, the adviser will ideally want this information for all of the client's plans / holdings at a particular point in time e.g. at the client's annual review, so will they be able to obtain accurate and current ex-post charges information from the providers at any given point in time? 
  • richallumrichallum Administrator
     :'( 

    Paraplanner. F1, Apple, Nutella, ice cream. No trite motivational quotes. Turning a bit northern. Republican.

  • I thought, probably too simplistically, you'd log in to a provider and ex-post costs are there for the previous 12 months, on a rolling day-by-day basis?
  • benjaminfabibenjaminfabi Moderator
    edited March 2018
    @edevan5 ;

    The ex-post reporting requirement for an investment firm is (broadly) based on the anniversary on the commencement of the service to the client.

    @arongunningham ;

    I've thought about how I'd calculate the ex-post monetary costs that a client has paid in the xyz UK Equity fund in the previous twelve months? (TISA has a really good spreadsheet that I think has been referenced here already)

    This charge is built into the unit price.

    I get to the situation where:

    a. I need to know the daily net closing price of that fund for the previous twelve months.
    b. I need to know the daily net closing value of the client holding in the fund for the previous twelve months.
    c. I need to know, or calculate, the daily gross closing price of the fund for the previous twelve months.
    d. I need to calculate the daily gross closing value of the client holding in the fund for the previous twelve months.
    e. I need to work out the difference in monetary terms over the twelve month period between d and b
    f. I need to express e as a percentage reduction in yield over the previous twelve months
    g. Repeat a to f for every fund in the portfolio

    I hope that this is going to be enabled within the platform at the press of a button.

    This method should by design include the disinvestments for advisers charges, platform charges and regular withdrawals/contributions including rebalances.

    I expect that the impact of platform and adviser charges can be manually calculated easily (I've built a spreadsheet for RIY of ongoing adviser charge).

    Hopefully someone will reply to this and tell me I'm way off the mark!
    Benjamin Fabi FPFS
    Chartered Financial Planner

    http://twitter.com/benjaminfabi 
  • @benjaminfabi Technically you are probably spot on.  I'm certainly not doing that though, I'm just using the actual platform and adviser costs from transaction histories and then using the current OCF and transaction costs on the current fund value - this last bit is inaccurate but the alternative is just plain stupid.  I'm allowing my usually pedantic head to interpret 'best endeavors' as just 'endeavors' and explaining in the disclosure the shortcomings on the fund and transaction costs and that actual costs should be available in future years when everyone has caught up with the legislation.

    Incidentally, feedback from the nine clients to have received a post disclosure has been pretty much meh.  Hours of work and many more thinking about it and they really aren't interested. 
  • StuartBFM said:
    Incidentally, feedback from the nine clients to have received a post disclosure has been pretty much meh.  Hours of work and many more thinking about it and they really aren't interested. 
    Yeah, i've had similar conversations with advisers. The response is the same. It's not me wanting to do all this work, we have to do it.
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