MIFiD II & Robo-advice

This article was originally published on AltFi.com.

This year is an important one in the evolution of Financial Services. From January advisors have been acting under the auspices of the much discussed but little understood MiFID II.

One of the directive’s most beneficial impacts will be making investment fees more transparent – At RiskSave we believe complex fee structures should be banned for retail clients. Unfortunately, in the current marketplace many opaque structures lead to charges that even a Finance degree can’t help unravel.  But technology is here to help and most of the new Robo-Advisors have simple and transparent fee structures enabling savers to compare different product offerings quickly and easily.

Whilst many in Financial Services have been critical of the growing ‘regulatory burden’ the changes MiFiD II will bring should be net positive for end users and ultimately society. Although legacy providers are likely to see revenues and margins shrink.

Many in the RoboAdvice sector are predicting a deluge of new customers and digital adopters as the new legislation comes to work and makes investors fully aware of the extent of decades of overcharging. This seems like optimistic thinking from those with a vested interest in Digital Platforms. But Regulation will likely act as a catalyst for positive change, as globally regulators are embracing transparency as a way of lowering cost and stimulating competition.

The Age of Transparency

Historically markets were opaque and it was in many cases difficult if not impossible to calculate the many charges and costs impacting portfolios. These costs, which include the cost of buying and selling of shares, taxes, custody, slippage and many more were not required to be disclosed by service providers. As users we have always been charged them, but were often oblivious to their impact and sometimes even their existence.

With MIFID II – those receiving financial advice will know what the investment will cost them. This is necessary step to eliminate hidden fees, which were previously not disclosed, but left investors poorer and less likely to meet their financial goals. For savers with a pre-existing relationship, MIFID II doesn’t compel financial institutions to disclose the same level of data to users until 2019.

MIFID II compliance costs have been driving up costs at Financial Institutions large and small for many years – even before its implementation – but despite driving up costs, it is likely to lower charges and lead to more efficient markets and better outcomes for investors. Conversely for service providers in this brave new world, higher costs and lower revenues may lead to troubles ahead.