MiFID II Ex-ante disclosure for fund switches/portfolio changes

Hi All,

Hopefully you can help with a discussion we are having in our office. We work on a bespoke advisory basis and generate personallised recommendations and portfolios for all of our clients.

Our original understanding of the MiFID II rules was that an ex-ante projection was required to be produced at the point of every change to the portfolio, so a switch from Fund A to Fund B within an ISA portfolio would require a projection to be produced and included in the recommendation. This has proved extremely time consuming given the volume of recommendations we get through.

How are other people approaching this issue? As it is a switch within a product for which an Ex-ante projection was provided when the investment was made, do we even need to provide another Ex-ante projection as any changes will be picked up in the Ex-post reporting?

Thanks

Alex

Comments

  • My understanding would be that MiFID applies at fund level, not wrapper level as it seeks to provide transparency for UTs, OEICs, ETFs etc.

    Therefore a fund switch would require fresh ex-ante reporting.

    Read this yesterday that may provide a little more background.

    https://www.ftadviser.com/investments/2020/01/22/what-advisers-should-have-learned-about-mifid-ii-so-far/?page=1

    I would happily like to be proved wrong on this, but it is one of the reasons we are moving away from bespoke portfolio services.

  • Hi Jona
    Thanks for your response. It seems like shoehorning clients into model portfolios is the only way to approach this with any efficiency as you say
    Alex

  • Our outsourced compliance team (360) said that for a fund switch we do not have to do a full costs and charges table, but can simply add a line to say that the recommended switch will result in an increase to your ongoing charges of XX% (£XX based on the current plan value). Then it gets picked up in the ongoing disclosure so they said this was sufficient.

  • Sophie that is interesting, we have had the same advice from our outsourced compliance consultants now too (BCompliant so a different firm). I hadn't been comfortable with the conclusion but good to hear that it has been backed up by a second opinion.

  • Hi all,

    Now we are a little further on with our experience of Mifid II and Ex Ante, does anyone have any further thoughts on this?

    We run MPS portfolios on platforms through our discretionary arm. We are being told that a switch into one of the portfolios will require an ex ante disclosure, even if there is no change in platform provider. This is causing bottlenecks, as its not possible in the vast majority of cases to illustrate for what is essentially a fund switch on the platform.

  • Hi there, @T_Smith - some observations which may help:

    • I believe yes you will need to disclose costs and charges. If you are recommending a new investment to someone, they will be need to be advised of a fund switch (as opposed to it being completed at your discretion). So if you needed to send your advice on a fund switch, the additional element of adding in the costs shouldn't be your only reason for a bottleneck (i.e. do you need more support?).

    • I assume that you are talking about requesting an illustration because that will show the charges? Would it not be possible to look back at your original recommendation and combine that with the cost of the new MPS? Ex Ante charges are not asking for what has happened, they are asking for what will happen based on the fees applicable and the current fund value. You can work this out yourself.

    • If you are recommending the same MPS to your clients, I guess you may have a good understanding of those charges and perhaps you can create a spreadsheet which you tap the valuation and charges into that can auto populate for your advice report. It shouldn't take long.

    • If I want to complete an Ex-Ante disclosure for something on our panel, it would take me less than a minute (due to having created those spreadsheets as mentioned).

    I hope this helps?

  • Hi Alex

    If you switch a fund within a product captured by Mifid ii, it will need to be communicated through a periodic suitability assessment (which is logical as you're making a personal recommendation to sell one fund and buy another) and also this will require a new ex-ante illustration.

    When you illustrate the future costs on the original investment, this assumes a certain holding period (you choose). If you change the portfolio, these future costs will not be the same.

    Most UK compliance consultants I've talked to this about will say that it's okay not to do this, relying on an ex-post to capture the actual costs. If it's a fund switch through a rebalance then that's reasonable, because you're returning the portfolio to the state of the initial disclosure and nothing is really changing. But if it's a full fund switch, then I think it's is a material change that needs fully reporting.

    However, if you have a compliance consultant advising you on what is acceptable disclosure then what they say is what you should do.

    @T_Smith it is possible to calculate the costs, as Aron says, from a spreadsheet. And if you're switching someone into a mps on a platform then I'd say you need to do a full suitability process.

    Benjamin Fabi FPFS
    Chartered Financial Planner
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