MiFID II: answering questions from the first few weeks
29 January 2018 | Topical insights
Advisers are confused about the costs and charges data they're seeing under MiFID II. In this conversation with Neil Cowell, head of UK intermediary distribution, we provide answers to some of the top questions we're hearing.
What is MiFID II trying to do with costs and charges disclosure?
One aspect of the MiFID II regulation is to provide further transparency on the costs and charges that investors pay when buying investment products. Over time, this should enable investors to:
- Make more informed choices on the products they buy; and
- Understand the impact that those charges will have on their returns.
MiFID II came into effect on 3 January 2018. Is all this data now available?
Providers are required to produce a large volume of complex data and, with the final regulations coming fairly late, some have not yet provided all of it. As a result, some platforms have suspended access to certain funds or providers where data is unavailable.
Has Vanguard provided the data necessary?
Yes, Vanguard has supplied all distributors and platforms with the necessary data to support the sale of Vanguard's European funds.
Can investors now make straightforward comparisons on costs?
It appears not. The first few weeks of the new rules have shown that investors and their advisers may not be in a position to make meaningful and straightforward comparisons. This is because some data may be missing from industry/platform data sets and, even where it is present, the rules allow providers to use several different methods to calculate the data.
But isn't the calculation basis a standard format?
No. MiFID II requires fund manufactures to disclose their costs and charges and, further, requires distributors to disclose these plus their own costs for advice and administration fees. However, it doesn't dictate the calculation basis to be used. An adjunct piece of legislation coming into force in a similar timeframe concerns Packaged Retail and Insurance-based Investment Products (PRIIPs). This requires similar cost disclosures for packaged retail investment products and provides several methods for these calculations. Therefore, the industry has broadly adopted the PRIIPs rules to satisfy the MiFID II rules.
So PRIIPs brings consistency then?
Not exactly. Again, the PRIIPs rules allow several methods to calculate costs. For example, the "New PRIIPs methodology" can be used for newer funds with shorter actual cost histories whereas the "Full PRIIPs methodology" can be used for funds with longer histories. Within both methods, there are areas that are subject to interpretation.
But doesn't this throw up inconsistencies and make comparisons difficult?
Yes. Even though increased transparency is providing more data, investors may find that it is difficult to make direct comparisons.
What other challenges do investors and advisers face?
In the first few weeks of the new disclosures we have seen unfortunate and sometimes misinformed comment on how the new rules work and some apparent anomalies in the data. For example, we have seen:
- Double counting of certain charges.
- Conflation of fund charges with adviser or platform charges.
- Different platforms carrying different charges for the same funds.
- Some charges appearing as negative (suggesting they are actually a profit!).
So, what would Vanguard suggest?
First of all, we would suggest investors and their advisers take some time to evaluate the emerging data set, realising that it is not yet complete and, in some places, possibly incorrect. It would be unfortunate if investors over-reacted to data that is still settling. Over time, providers also have to report ex-post (actual) costs and charges and this may improve the quality of the data set. We also expect providers to update their methodologies over time and we may see more consistency emerge.
Secondly, Investors should seek to understand the three core sets of costs they may incur when investing, together with their constituent parts. (Whether clients pay all three will depend on whether they have an adviser and how their investments are managed on a platform.) In doing so, investors should understand how the costs involved are actually paid. For example, a rough guide might be to consider the following:
- Fund management costs
- Any entry costs to the fund deducted from your investment before it is invested.
- The ongoing costs for the fund; this includes the ongoing charges figure (OCF), which is the charge paid to the fund manager for managing the investment and is known to the client in advance. This OCF is deducted from the fund's value to pay the fund manager for managing a client's money and shows up in the fund's price and therefore the returns investors see. The ongoing costs figure now also includes additional fees or credits (such as stock lending fees or bank interest credited).
- Transaction costs – these are the charges incurred within the fund for buying and selling the underlying assets in the fund. It includes dealing costs, taxes, etc. This charge does not go to the fund manager but, as a cost of maintaining the correct assets in the fund, will reduce the fund's return. This charge is deducted from the fund's price to pay the costs associated with buying and selling assets in the fund and the result of this charge is seen in the performance of the fund. This has always been the case.
- Platform /Administration costs
- Initial/Set-up costs – which may be charged by the platform for initiating investments or setting up product tax wrappers such as an ISA. These may be taken from the value of a client's investments or settled directly with the platform provider.
- Ongoing administration costs – typically annual or monthly fees for the ongoing administration of a client's investment funds or products on the platform. Again, these charges may be deducted from the value of the client's investments or settled directly.
- Advice fees
- Initial fees charged for setting up a client's advice – agreed with the adviser and settled directly or deducted from the client's investments
- Ongoing fees charged for ongoing advice – agreed with the adviser and settled directly or deducted from the client's investments.
Why are some funds' costs showing up differently on different platforms? Surely they should be the same?
Remember that different platforms will have different platform administration costs. So don't confuse these with the costs of the fund itself. When looking at the fund cost itself, typically the fund might cost the same, and show the same, on most platforms. Where it doesn't, there may be an error in the data being provided and investors should query with the platform provider where there is a difference. In some cases, platforms might have negotiated a better price for the fund and any difference will be legitimate.
How should I view "negative charges" when I see them?
Investors should treat negative charge numbers with caution. The negative number may be an anomaly (although allowable) within the calculation methodology. The Full PRIIPs methodology requires fund managers to calculate a "slippage cost", which includes brokerage charges and any movement in the security price between the time an order was placed and the time it was executed. The intra-day movements of security prices mean that the slippage cost can sometimes produce a negative number, appearing as though the cost of the trade is actually a profit. The presence of negative numbers may be distorting the picture of true costs being borne by investors.
So, is MiFID II really any use for investors?
The MiFID II regulations contain many aspects that will improve the prospects for investors through better management of funds and higher requirements on knowledge and competence in addition to the requirements on disclosures.
This new transparency is a good thing for investors. Better access to accurate, timely information will help investors and their advisers make better-informed decisions and help investors to keep more of their returns. In the near term, it is unlikely that lower-cost funds have suddenly become expensive and high-cost funds have suddenly become better value. But, over time, more transparency will lead to better decisions and investors will vote with their feet. This will drive competitive forces that should improve the value for money investors receive.
In the very near term, given the complexity of producing the required disclosures, investors would be well-advised to take time to understand the data they are being presented with, work out what matters to them and question the provider when they see numbers that don't seem to ring true.
MiFID II hasn't increased costs. It has increased transparency on costs.
Head of intermediary distribution, Vanguard UK
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