MIFID II costs and charges disclosure

2

Comments

  • As an aside, are any paraplanner here experiencing push-back from advisers to not fully disclose these hidden transaction costs?
  • 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.
    I think this quote has it in a nutshell. Advisers may be pushing back about disclosing it because it confuses clients or makes everything seem really expensive, but at the end of the day we can only do what we must do.
  • As an aside, are any paraplanner here experiencing push-back from advisers to not fully disclose these hidden transaction costs?


    Not push back, as they have been told in no uncertain terms that client money will not be invested until such time as the client acknowledges receipt of the pre cost disclosure.

    Whilst nothing has changed for clients, it does highlight how expensive it can be to invest, get advice, pay for funds etc. We have had a  couple of clients push back and a few advisers have started to use our passive portfolios whereas in the past they were dead set against it.

    It was mentioned earlier in the thread, and I agree- the external DFMs we use, including some of the biggest in the UK, have been absolutely woeful in their attempts to do the cost disclosure.


  • I can't help but think we're all missing a trick somewhere with all this and it will all suddenly become clear...

    Hey ho. In reply to @edevan5 I've reattached your example with some comments.

    Jonny (paraflex)
  • Thanks @parawhat really appreciate your comments and feedback. Answers to your queries below:

    Yeah, I’ve seen that providers have been quoting charges in monetary terms for “subsequent years”, but IMHO, in the absence of a crystal ball, this is at best confusing and at worst wholly misleading - so many assumptions are having to be made to calculate these figures that they are pretty meaningless.

    Agree, “aggregated” isn’t going to appear in any beautiful word lists any time soon – just trying to get on-board with the lingo!

    No, I don’t believe there is any specific requirement to be this granular - just trying to be clear and transparent. I also think there is a benefit to pulling out “transaction charges” – otherwise clients may start to question why their investment-related charges appear to have suddenly “increased” by circa 20% to 50%. Yes, the transaction charge is meant to solely relate to the underlying investments. I would envisage any platform-related transaction charges being included within “Platform Service Charge”.
     
    The illustrative / projection of charges aspect is indeed an interesting one, and I’d refer you back to points 4 and 5 of my original post. I haven’t read anything that specifically states this information MUST be included in the suitability report. However, I stand to be corrected, and it would be interesting to hear other’s thoughts on this matter.
  • Sorry, here's points 4 & 5 of original post...save flicking back...

    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.


  • Yeah, I’ve seen that providers have been quoting charges in monetary terms for “subsequent years”, but IMHO, in the absence of a crystal ball, this is at best confusing and at worst wholly misleading - so many assumptions are having to be made to calculate these figures that they are pretty meaningless.
    I actually agree and wondering whether I should stick with how we're doing it i.e. one-off (initial) and annual (ongoing). I was just concerned we weren't doing it as per the rules. Given FCA aren't going to come down hard either which way in this first year, I might stick to my guns!
    Agree, “aggregated” isn’t going to appear in any beautiful word lists any time soon – just trying to get on-board with the lingo!
    I can see the argument of using the same language used in the regulations for consistency, but bearing in mind who would have drafted this and how for it is from everyday language typically used in the UK financial services industry, I think it is our job as advisers to 'translate' as far as possible. So, I'm going to try and keep to these three broad categories: 1. Advice Fees 2. Product/Platform Costs 3. Investment/DFM Costs.
    No, I don’t believe there is any specific requirement to be this granular - just trying to be clear and transparent. I also think there is a benefit to pulling out “transaction charges” – otherwise clients may start to question why their investment-related charges appear to have suddenly “increased” by circa 20% to 50%. Yes, the transaction charge is meant to solely relate to the underlying investments. I would envisage any platform-related transaction charges being included within “Platform Service Charge”.
    I'm taking the view that the transaction charges bit is for the advisers to cover off in their meetings. It's just too much to try and explain in the SR without adding more confusion. It just needs a face to face explanation i.e. "You were always paying these charges, they are just a cost of running the fund, fund managers now have to disclose, it can only be a good thing as puts pressure on fund managers to reduce costs etc". Agree re lumping platform/product transaction charges within the platform/product charge. I think I'm coming to the view of having a simple summary table in the body of the report that aggregates the initial and ongoing costs per product for the three areas mentioned above.

    The illustrative / projection of charges aspect is indeed an interesting one, and I’d refer you back to points 4 and 5 of my original post. I haven’t read anything that specifically states this information MUST be included in the suitability report. However, I stand to be corrected, and it would be interesting to hear other’s thoughts on this matter.
    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.


    I think it does - see Article 50(10) of the regulations - snip here:


    The providers seem to have satisfied this in their MiFID cost & charges disclosure documents by incorporating a mini illustration. Whether the normal illustration an IFA would produce would tick this box I'm not sure. And what about GIA/ISA illustrations which aren't usually provided or are generic?

    Jonny (paraflex)
  • edited March 2018
    This is going to be an ongoing struggle between advisers and paraplanners. Advisers (being stereotypical) don't want to highlight all these 'new' charges whilst Paraplanners (being stereotypical) are trying to tell Advisers that we have to, it's not an optional disclosure!

    Transaction Costs

    In the short time since 3 Jan I've come across multiple hurdles displaying transaction charges.

    • When the ceding scheme is a PP and we're transferring to a SIPP, you move from non-MIFID regs to MIFID regs. You can't find the transaction costs for the pension funds -- rendering a cost comparison unfair.
    • When we request an investment proposal from a DFM, the transaction costs are not provided to us. Some DFMs are unable to change their OCF figures. I can't find the transaction costs myself because SEDOL codes are not always provided either. (I don't know if the transaction costs are provided when you prepare an illustration on a platform?).
    • If you do manage to find the fund codes for a new investment, it's going to add an hour or 2 to compile all the transaction costs, and there's no easy way to export the data.
    • Transaction costs - in as much as the way I understand - is the cost of the fund manager making trades. (1) Higher is not necessarily worse, as much as you could say higher AMCs is worse (for the same fund type). (2) Some cost disclosures are mislabelling things (such as PTM levy and Stamp Duty) as the transaction costs.
    I think we will end up completing our cost table without transaction costs, with a generic paragraph underneath essentially saying there could be more expenses, such as transaction costs. In my short experience, the average cost seems to 0.2% for transaction costs, we could even mention that figure as an estimate. That solution would cover off a lot of the issues we're having and I'm sure it's still far beyond what average joe IFA is doing.

    Initial/Ongoing Vs First year / subsequent years.

    We are moving to first year / subsequent year. Once you get your head around the way it should look, it makes good sense to include initial fees with ongoing fees and label it year 1. It avoids any doubt over the definition of initial and ongoing (i.e. how long do the initial fees cover me for and when does the ongoing cost kick in (not that anyone asks those questions I don't suppose!)).

    In DFM-world it's also significant because they will do fewer trades in the 2nd year (and beyond). Their dealing costs are lower after year one.

    Aggregated costs illustration

    As shown in my earlier excel (which I've since amended even further), this is something we are adding to our reports now. Mine goes a bit further than most I've seen because it compounds daily which I feel adds a bit more value.

    As highlight by @parawhat this appears to be a requirement.
     
  • parawhatparawhat Member
    edited March 2018
    Good summary @arongunningham and so true about advisers and paraplanners!

    • When the ceding scheme is a PP and we're transferring to a SIPP, you move from non-MIFID regs to MIFID regs. You can't find the transaction costs for the pension funds -- rendering a cost comparison unfair.
     

    When comparing to non-MiFID pension we've just been comparing like with like so OCF/TER vs OCF/TER and putting a note to cover off why the OCF differs from the ongoing charges in the later costs and charges summary table for the new recommended product.

    • When we request an investment proposal from a DFM, the transaction costs are not provided to us. Some DFMs are unable to change their OCF figures. I can't find the transaction costs myself because SEDOL codes are not always provided either. (I don't know if the transaction costs are provided when you prepare an illustration on a platform?).

    I wouldn't be as concerned with DFM recommendations as my view would be the onus to disclose falls on them and not the IFA, especially when you consider that technically we wouldn't know what funds they are actually going to end up investing in by the time the client money reaches them. That said, we're taking the view that we will still disclose an 'estimated' cost for the underlying funds (including transaction and incidental costs) as we would do for non-DFM business, on the basis that once the DFM receives the monies they will confirm the ex-ante costs more formally. The DFM  provides us the estimated costs for it's different portfolios once a month.

    I think we will end up completing our cost table without transaction costs, with a generic paragraph underneath essentially saying there could be more expenses, such as transaction costs. In my short experience, the average cost seems to 0.2% for transaction costs, we could even mention that figure as an estimate. That solution would cover off a lot of the issues we're having and I'm sure it's still far beyond what average joe IFA is doing. 

     I'm not sure you can choose to ignore the transaction costs from your ex-ante disclosure as isn't that part of the rules? If you're really struggling to get the figures I would say an estimate is better than nothing and shows you are making a 'best endeavours' attempt. I also agree that we're all probably doing more than average Joe IFA so we've probably not got much to worry about, at least for the first year or two.

    I'm still not decided on the initial/ongoing vs 1st/subsequent years thing. Anyone else got any thoughts?
    Jonny (paraflex)
  • parawhat said:
    I wouldn't be as concerned with DFM recommendations as my view would be the onus to disclose falls on them and not the IFA, especially when you consider that technically we wouldn't know what funds they are actually going to end up investing in by the time the client money reaches them. That said, we're taking the view that we will still disclose an 'estimated' cost for the underlying funds (including transaction and incidental costs) as we would do for non-DFM business, on the basis that once the DFM receives the monies they will confirm the ex-ante costs more formally. The DFM  provides us the estimated costs for it's different portfolios once a month.
    There are 2 types of DFM-Adviser-Client relationships, one where the client is a client of the DFM and another where the client is a client of the Adviser.

    Everyone here will (i'm sure) fall into the Client-Adviser category and in this category, it's the adviser's responsibility to disclose all the charges, not the DFM.

    So we've been told anyway!
  • If that's the case that actually makes it easier - at least we know where we stand!

    The problem, as you pointed out, is getting the necessary information from said DFMs to be able to do the disclosure in the first place!
    Jonny (paraflex)
  • Does anyone have other examples of the 'cumulative effects of costs and charges'.

    I've had a question from an adviser if it's worth the hassle of trying to identify and show the compounding of the portfolio in this illustration?

    I like it having compounding so that it adds an extra bit of 'value' for the client to see the true 'effect'

    Does anyone else have opinions whether or not we should be compounding the growth?
  • This is the quick and dirty ongoing adviser charge ex-ante RIY calculator I put together a few weeks ago. I haven't looked at since until just now, I'm not sure I like how it deals with initial costs as it shows them over one year. Plus it doesn't deal with inflows/outflows.

    I'll happily spend some time developing it if people think it serves a useful purpose in calculating disclosure. It's free as uploaded to anyone who wants to use it, but you assume all the bust risk if it's found wanting :) .
    Benjamin Fabi FPFS
    Chartered Financial Planner

    http://twitter.com/benjaminfabi 
  • Here's mine, a bit further developed that previous.

    The only snag now is whether we need to compound the effects of charges?
  • You need to compound the charges, as per the example below, to arrive at the effect of those charges.The effect being the result of the compounding. 

    To determine the reduction in yield, the frequency of the charge deduction will dictate the minimum number of compounding periods in the calculation. In my spreadsheet, as an example, it's a 1/12th deduction of an annual % charge, therefore it compounds monthly over a one year period. The 'APR', if you like, in that 5% example is 4.92%pa, which compounds monthly to arrive at 5%pa.

    So, a 1% annual charge becomes an effective 1.05% RIY. Broadly, the RIY of a given charge can be arrived at by increasing that charge by the annual equivalent growth rate: 

    0.01 x (1+0.05) = 0.0105, or 1.05% 

    If you ran it at 7% 'APR', it would come out at 1.07%. It's still the same 1% charge, but you're taking it from a fund that is gaining more value over the period, so the effect of the compounding is correspondingly higher.
    Benjamin Fabi FPFS
    Chartered Financial Planner

    http://twitter.com/benjaminfabi 
  • In the spirit of sharing here is the one I came up with. This is slightly different than @benjaminfabi ;and @arongunningham ; versions as mine is based on a fixed set of model portfolios as we were finding we were just keying in the same info multiple times a day. My plan is to update the underlying OCF, transaction, incidental cost data once a month (and funds/asset allocation when changes). Instead of a 20 minute job it's now about 3 minutes!
    Jonny (paraflex)
  • @parawhat ;  question for you - how do you deal with multiple products, eg investing in all three? Is there a way to aggregate costs?
  • @Suse1969 we do a separate cost comparison for each product. I don't think you can aggregate across different products. At a push, I reckon you could argue aggregating across ISA & GIA on same platform, but beyond that probably not. What we do sometimes with multiple product cases is combine the individual tables into one big master table by turning the page landscape.

    Jonny (paraflex)
  • edited March 2018
    my 2 pennys: You can aggregate across products in as much as you are giving advice to a client across a number of products and that it's the total costs 'to the client' that we're being asked to provide an aggregate.

    We keep a spreadsheet of the breakdown per product too, obviously.

    To be honest, I do foresee problems arising, but so far it's been pretty painless to aggregate in this way.

    EDIT: Don't forget - The aggregated costs are the total costs of the new recommendations - we're not being asked to aggregate costs for the purposes of comparison, that is, in my opinion, a separate issue.
  • Thanks both for that. I posted when we started looking at your spreadsheet Jonny as this is closest I've seen to what we need and we got to the same conclusion. We've a pretty straightforward proposition and when it gets more complicated then I'm happy to do the extra work. But we need something like this or else we'll go out of business!

    This thread is terrific.

  • I can see the benefit of aggregating across, say, GIA and ISA. In fact I did one myself earlier, so I think I take back my earlier view! ;-)

    However, I'm not sure I see what benefit the client would get from seeing aggregated costs across SIPP lumped together with a GIA/ISA. Aren't they two separate recommendations and therefore cost disclosure should be separate?
    Jonny (paraflex)
  • edited March 2018
    I think the benefit to the client is they're provided with 1 table rather 2 or 3. 

    I guess the only thing that changes with having separate tables is the product wrapper costs - advice and investment costs are likely to be the same, so in my opinion, it avoids repetition.





  • Sorry to bring up an old thread (I wasn't sure if it was better to start a new?):

    Our compliance company have said 'subsequent years' disclosure is not necessary under MIFID II.

    currently, we have first-year charges and subsequent year charges in one table, and the effect of those on performance in another table.

    Does anyone have feedback if subsequent years disclosure is mandatory and if not, whether you are including those year 2+ charges in your reports?

  • benjaminfabibenjaminfabi Moderator
    edited September 2018

    _"50(5) The obligation to provide in good time a full ex-ante disclosure of information about the aggregated costs and charges related to the financial instrument and to the investment or ancillary service provided shall apply to investment firms in the following situations:

    (a) where the investment firm recommends or markets financial instruments to clients; or

    (b) where the investment firm providing any investment services is required to provide clients with a UCITS KIID or PRIIPs KID in relation to the relevant financial instruments, in accordance with relevant Union legislation."_

    I can see a case being made in certain circumstances.

    Benjamin Fabi FPFS
    Chartered Financial Planner

    http://twitter.com/benjaminfabi 
  • I am newly registered to the site, however have been lurking on this post for a few months as the firm I work for has started to think about ex-post reporting.

    As one or two people have mentioned earlier in the thread, we have a real challenge around how we will manage ex-post reporting for those clients (the majority) who have multiple platform accounts, product providers and off platform assets.

    We are now starting to see platforms confirm their approach to ex-post reporting and it is fair to say that there is no alignment across platforms. The current position is that we are likely to receive multiple platform / provider reports throughout the year which may contain slightly different information. This obviously leaves us with the question around how they can be aggregated practically at review time (when they may be 6 months out of date!) to provide clients with meaningful & relevant information.

    We are not seeing much around external advice or tools that cover this situation and I wondered whether anyone had any words of wisdom that might help?

    All thoughts appreciated :-)

  • Hi Hazel

    Welcome to the forum. Lurk no more, get involved! I think the concensus among everyone I talk to about this is that it is going to be very fluid for a while.

    We were recently treated to 7IM plans for reporting mifid costs next year. It's not got me feeling comfortable about the challenges ahead for us at adviser firm level.

    I've yet to see anything from another platform provider, so please share if you have it. My greatest concern remains reporting actually incurred fund charges, which has been covered in these pages in detail already.
    Benjamin Fabi FPFS
    Chartered Financial Planner

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

    James Hay have mooted that they are considering a one-off report in Q1, followed by a move to an annual report that aligns to plan start dates. (This is unlikely to align to our client annual review dates.)
    Fidelity are doing something similar apparently, although they have said that they are also looking at providing advisers with information in a feed on a monthly rolling basis.
    Standard Life have said they "are all over it" but cannot tell me anything specific until sometime in Q4.
    Cofunds haven't said anything specific but look like they might be taking a similar approach to James Hay.

    So from a platform & provider perspective it is a bit of a waiting game.

    The 'thinking' challenge is then how do we aggregate all these bits of paper into one table without having to spend lots of time manually inputting numbers?

    I am starting to think that an external tool, if there is one, might be a preferable solution!

  • Sorry to drag up an old thread but I'm currently battling with our adviser to add in an aggregated costs and charges diaclosure of our own in the report (MIFID friendly). Whilst we obviously disclose the ongoing costs we don't provide a projection apart from the provider illustrations.

    His view is that the provider illustrations cover all of the necessary disclosures, whereas I think these are often quite hard to understand for clients!

    In short - would relying on the provider illustrations for ex ante Mifid be acceptable?
  • Hi @AndyRichards

    Yes. I do this for several clients when they have everything coming out of the platform. You just have to check that the illustrations include all the costs and you can aggregate the figures into a table in your report.

    If you do a separate one alongside the provider illustration you're potentially introducing more confusion with a different set of figures.

    Benjamin Fabi FPFS
    Chartered Financial Planner

    http://twitter.com/benjaminfabi 
  • No. It's the adviser's responsibility to provide the information to the client, not the providers (I think).

    So at the very least, it would be prudent to copy those provider tables into your report.

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