The regulations are designed to increase transparency and strengthen investor protection. They require investment advisers to report on actual costs and charges at least once a year, ban commission payments to independent financial advisers, and mandate ETF trade reporting, bringing greater visibility of trading volumes and liquidity.
“The big change Mifid II brings is a greater focus on transparency of costs,” says Stephen Cohen, head of iShares at BlackRock for Emea. This will accelerate next year when people begin to receive reports of what they paid for their investments, which will shine a light on what value managers are delivering, he adds.
Mifid II is expected to drive a shift to fee-based advice with discretionary managers, who make investment decisions on behalf of their clients, coming to the fore, and more money flowing into low-cost passive funds via fund platforms.
A similar trend in the US has taken passive fund market share to 38 per cent, split equally between ETFs and index tracking mutual funds, according to data from Broadridge, a corporate services company. In Europe, the proportion in passive is 16 per cent, also split more or less equally between ETFs and trackers.
Fund manager Vanguard reports a Mifid-related increase in demand for its ETFs from discretionary managers, who use the products as core building blocks in client portfolios, although it says low interest rates are also a factor. Using ETFs means managers “can lower their own costs and offer a better proposition to users”, says Thomas Merz, head of European distribution at Vanguard.
However, he believes that change will come slowly in Europe as retail investors there are mainly served by banks rather than independent financial advisers.
Another problem identified by Deborah Fuhr, managing partner at ETFGI, a London-based consultancy, is that many fund platforms in Europe do not offer ETFs. “They say there is no demand,” she says. It will also take time for advisers, now expected to look at a wider range of products, to familiarise themselves with ETFs. “There is a need for education,” she adds.
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