MIFID II: The Revolution in the World of Investment Funds

The new MiFID II Directive brings a series of changes in the financial instrument markets. This new regulation, created in Brussels, tries to achieve a more secure, transparent, and responsible financial system.

If the period of entry into force is not delayed again, in January 2018, a new chapter will be opened in the history of investment funds. And it is not trivial since the new regulations bring about the long-awaited transparency and a drop in prices to the funds. Along these lines, we will see what it is based on, what changes it gives us, and how investment in funds becomes more attractive than ever.

WHAT IS MiFID II AND WHAT CHANGES?

The current MiFID (Markets in Financial Instruments Directive) is a European directive that regulates the provision of investment services and, therefore, directly affects all companies that inform, advise or sell financial products to their clients. The MiFID Directive entered into force on November 1, 2007, in order to protect the client, regulate the behavior of the entities, and increase competition between them.

However, despite the fact that the issues it regulates indirectly affect all types of investments (therefore, the managers, depositors, and traders of investment funds) only covered the variable income directly. The new MiFID II directive tries to solve this situation and put in the framework of the European financial services regulations, the large forgotten in MiFID I, such as funds and fixed income (in addition to derivatives, raw materials, and structured products ). Now, and thanks to the new regulations, the funds will enjoy greater transparency and better costs.

To simplify, we will say that the MiFID II is a recast of the normative text of the current expanded MiFID I and with improvements for the investor.

The main changes that apply and that directly affect the funds are the following:

About the “retrocessions.”

The retrocessions (also called “rebate” of commissions) could be called the collection of incentives for the commercialization of a fund.

When a client wants to buy a fund, he usually contacts his bank or any financial entity that markets these products. It is also normal for the bank or said entity to offer its own products.

However, the client decides that he is not interested in any product of the entity to which he goes. For whatever reason (costs, the inadequacy of the profile as an investor, search for a specific fund, etc.)

In this case, the marketing financial entity must go to an intermediary platform in which the funds are distributed. These platforms put their managers in contact with the participants.

In Spain there are three:

  • funds (AllFunds has a much higher market share).
  • Tresses
  • And Andbank.

It’s like going to a wholesale market for investment funds.

Logically, these wholesale platforms want to charge and are entitled to it, since they provide a service. The collection is carried out through the retrocession of a part of the management commission paid by the client.

This was the model that was applied in investments in funds. As you can see, it does not enjoy total transparency, and the retrocession commissions were in the shade. Well, all this will change with the entry into force of the MiFID II Directive.

Now, these costs must be informed to the client that only in the cases that can be charged.

Later we will analyze the positive consequences that this entails for the fund.

Inverter protection is reinforced

One of the measures is that the entities that provide advice must register as Independent or Non-Independent.

  • An entity that defines itself and registers as independent must advise on products that exist in the financial markets and not only those sold by its entity. It is totally forbidden in this case, the collection of recessions, and must inform in detail their costs for advice. Counseling is the only concept they can charge.
  • On the contrary, an entity that is defined as non-independent can charge backward, and incentives from third parties, but must inform the investor of all the costs broken down according to the concept (including whether or not it charges for advice). Investors in funds are entitled to a detailed report on the costs and returns of the product.

This affects and changes the way of working of those financial entities that are dedicated to commercializing their own products. When marketing their own products, they do not provide comprehensive advice. However, they do charge that advice in a hidden way through third-party recessions and incentives.

Total transparency

One of the specific objectives of the MiFID II Directive is to provide transparency to the management costs of investment funds. In fact, they will be provided with absolute transparency, both in costs and income.

As mentioned with the arrival of MiFID II, the participant of a fund will know in detail the concepts for which he pays :

  • Management Commission
  • Administration Commission
  • Custody commission.
  • Market analysis.

Until now, the funds were not broken down in such detail, and there were costs that the investor did not know.

AND WHY IS ALL THIS GOING TO CAUSE A REVOLUTION IN INVESTMENT FUNDS?

Although the measures outlined may seem simple, the MiFID II Directive brings a genuine revolution in the market that will benefit customers.

The first point to highlight, and is not insubstantial at all, is that from now on the investor has all the data in hand to be able to evaluate the management, know the concepts of each cost and evaluate in a more objective way if the product Financial is the most suitable for your savings. The information offered will make us more objective in terms of investment decisions.

But not everything ends here. As of the entry into force of MiFID II, the investment fund industry will be persuaded by transparency and competition. This will cause an authentic and more than the foreseeable reduction in their costs and in the way they work.

Unquestionably there will be a drop in management fees, reducing intermediation margins. The retrocessions will be in sight of the participant. That only in cases where they can be charged.

The fund investor will know exactly what he pays and how the money he disburses is distributed. So all items that can be collected will be reduced to the maximum to gain competitiveness in the market. They will lower the advisory commissions, so far hidden. In addition to others as a result of the total and absolute transparency offered by the regulations. As it can not be otherwise, lowering costs profitability will grow.

Each fund should be made more attractive in the face of the potential participant and not only should it be more economical, but it will also mean a significant improvement in the quality, both of the quality of the managers, as well as of the advice, as well as in their commercialization.

A metamorphosis is approaching in the industry, and MiFID II puts things very expensive to invest in them. The world of funds will undergo major changes, and the quality/price ratio of these financial instruments will improve to unsuspected levels.

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