Published: 12 March 2019
The impact of investor protection reforms that took effect in January 2018 are set to become more apparent for many people in the coming months.
The Markets in Financial Instruments Directive (MiFID II) brought in a raft of changes to strengthen protection for investors. Some mainly impact investment firms - such as a requirement for fund managers to disclose any research costs passed on to customers. But others have the potential to help investors manage their long-term finances more effectively.
Keeping track of investment values
Investment service providers like Alliance Trust Savings must now provide you with quarterly statements to help you keep track of your investments.
There is also the so-called 10% rule, where firms that make investment decisions for customers have to tell them if their portfolio value drops by 10% or more over a 3 month period. With recent market volatility some investors who work with these discretionary managers will already have received notifications like this, giving them the opportunity to understand what is going on and discuss with the firm concerned.
Alliance Trust Savings is an execution-only service provider, which means you make your own investment decisions. We will only send you a 10% notification for any leveraged investment you hold through us, as the rule also applies to those too.
Read our MiFID II guide to find out more about what a leveraged investment is and whether you might hold one.
Understanding the charges you pay
There is also now a requirement for investment service providers to send you annual details of the actual costs and charges you have paid to hold your investments over the course of the year. That includes the costs and charges for the investment services you use and of each of the investment products you hold.
The first round of these Annual Costs and Charges Statements (also referred to as Ex-Post Statements) will be landing on doormats and arriving in inboxes over the coming months. You can expect yours from Alliance Trust Savings in the Spring. They will show the total one-off, ongoing and transaction costs you’ve paid both as a cash amount and a percentage figure, along with the effect those costs have had on your investment returns.
You may be tempted to skim or ignore these new statements, but that would be an opportunity missed. Here's why:
It can help you get into the review habit
The arrival of any regular investment statement offers the perfect opportunity to take stock of your investments, think again about what you want from them in case your circumstances have changed and, when it comes to your new Annual Costs and Charges Statement, ensure you understand what you’re paying for them.
This last point is particularly pertinent if you’re saving for the long run, because unnecessarily high charges can leave a big dent in your retirement plans.
It can help you work out what value means
Your Annual Costs and Charges statement may offer you a new perspective on the relationship between fund charges and investment returns. There is no doubt that high charges can erode long-term investment growth.
However there’s not necessarily a direct correlation between charges and long-term performance – a fund or investment trust with above-average charges may also be a consistent outperformer. Conversely, a bargain basement fund in terms of costs might also be a laggard in terms of performance.
So high charges alone aren’t a decisive factor. What matters is that a fund or trust can provide good returns and help you meet your objectives. If it can (and remember past performance is not a guide to future performance), the impact of its charges is potentially less of an issue.
The amount you pay for investment services from a platform like Alliance Trust Savings is relevant here too. We charge flat Account fees, so the cash amounts you see for these should be familiar. But you’ll also now see them shown as a percentage amount, helping you more easily compare our costs to those of other investment service providers who charge on a percentage basis, and vice versa.
It's a reminder to understand what you’re investing in
Investors that focus only on charges may be tempted to switch all their assets into the cheapest options - which will often be ‘passive’ funds (such as ‘trackers’ and exchange traded funds). These follow a certain index, whereas actively-managed funds aim to make investment decisions that give them a chance of outperforming a benchmark index and/or their peers.
Both can have their place in a portfolio, and growing awareness of the impact of high charges has increased the popularity of passive funds. These are cheaper because the way they operate means costs are lower, however as the funds are linked to the index they track, if it falls sharply the fund will too (and vice versa).. In other words, think about what different types of fund can potentially offer you and what that means for meeting your investment objectives. Otherwise there may be a risk of letting the charges tail wag the portfolio dog too much.
It's a convenient point to get help if you need to
For investment services where you work with an adviser through an investment platform, the fees you’ve paid to them will be disclosed too, along with the costs and charges for any platform your investments might be held on, and the investment products you use.
This is a good chance to talk to your adviser about your portfolio and also about the value you are getting from your arrangement with them, particularly if you’re paying ongoing charges for advice and are not clear on the service you’re getting for your money.
If you don’t have an adviser and want some help to use the new statement information to review whether you’re getting value for money, now might be the time to think about investing in advice. They could make a positive difference for you when it comes to your long-term financial wellbeing.
Have you confirmed your nationality and identifier?
Ending on a practical note, MiFID II also means you have to confirm your nationality and identity to us so we can meet new regulatory reporting requirements.
We asked all our customers for this information some time ago, so if you haven’t got around to it yet we can’t trade any investments for you until you do. It’s quick and easy to give us the information through your online Account, so why not take a minute to login and do it now.
Alternatively you can call our Customer Services Team on 01382 573737 (lines are open Monday to Friday, 8am to 5pm, and calls may be recorded for training and monitoring purposes).