Can MiFID II make Financial Markets more efficient after all?

With MiFID II now in full swing, anyone buying or selling stocks, bonds, foreign exchange, commodities or exchange-traded funds is now affected by the new standards. Improving investor confidence while strengthening the industry don’t come for free. On top of revising costs and charges, the Directive brings more choice and lower prices for investors. After all, can MiFID II make Financial Markets more efficient? That’s the question we’re answering in this post.

What has changed since 3 January 2018?

MiFID II touches on roughly all aspects of individual investing, or so. This includes investment advice, how products are sold and regulated, information and costs. The overall aim is to enhance protection for retail investors. In other words, there’s now greater transparency over the way funds are sold and a downward push on costs for retail investors.

Another important part of MiFID II imposes greater transparency on costs. Basically, this European Directive redefines rules on how investment firms receive commission when providing services to their clients. In simple words, any portfolio manager or firm which provides individual financial advice can no longer retain payments from a third party. So, fund managers will have to justify any incentive by enhancing the quality of the service provided. Retrocession fees paid by fund managers to their distributors is a thing of the past.

MiFID II likely to give passive funds a boost?

MiFID II’s drive for transparency on costs would potentially shift the balance further in favour of passive investing. On the one hand stands active fund management, which is based on selecting securities by a manager and adjusting it to market conditions. On the other hand, there’s passive management, which is roughly speaking automatic with no retrocession fees. So, does it threaten the very existence of active equities managers?

Well, it’s more about redesigning their services and hence strategies. By imposing consistency between the client risk profile and the costs, MiFID II forces fund managers to adopt a high-conviction investment style, taking strong positions in certain securities and industries. And, this involves more selectivity and fewer choices.

What we think

MiFID II can redesign asset management. I think two mutual worlds will emerge. On the one side, there will be sophisticated management offering a wide choice of strategies and customised products. And on the other, simpler management – at lower cost, with limited product allocations.

 

Answering our initial question: Can MiFID II improve the efficiency of Financial Markets by making the ecosystem of information on listed companies transparent? As it stands, investors might not get it all.

If you need to catch up with MiFID II, watch this video: