Jackie Beard, Director of Manager Research Services for Morningstar in EMEA
MiFID II requires investment firms to check whether their funds are fit-for-purpose, relevant for today’s investors, and offer good value.
While certain funds have less relevance in today’s investing world, and notwithstanding the costs involved in fund closures, there is a degree of complacency among some asset managers. Investor inertia – or lack of awareness – also plays a role in prolonging the life of funds that are no longer relevant for today’s investors. Asset managers should take a long, hard look at the funds they offer and ask themselves these questions: Is every fund in their line-up relevant? Are they priced competitively? Does the firm have the right skill set and expertise to manage these funds well?
The number of fund share classes available for sale in Europe has grown at an exponential rate in the last decade. We hope that MiFID II product review requirements, which must be proved through an audit trail, will eventually prompt action to be taken on some of the long-established funds that have lost their way. These still exist because the assets are sticky, in spite of indifferent management.
Asset managers will need to ensure that their products function as intended to avoid any potentially detrimental consequences for investors. As well as a regular review, they will be obliged to review their products when they become aware of an event that could materially affect the potential risk to investors. Not only do investment firms need to carry out these checks, they must prove that they’re doing so and evidence this with an audit trail. There is no timeline or frequency specified in the Directive; we believe best practice is a semi-annual review, although we think it’s more likely that it will be done annually.
We think the industry developments brought about by MiFID II will be good for investors. High fund fees and value for money will be brought to the forefront of attention, and asset managers will no longer be able to ignore the continued existence of funds that have lost their way.
Given the need for firms that fall under MiFID II to show proof of an audit trail of these assessments, questions will soon be asked if flaws are evidenced regularly, yet repeatedly ignored. Any positive action on the back of such a review, which shows a clear benefit to the investor, could encourage greater interest from investors and their advisors, as that firm will be demonstrating good stewardship of assets.