This is where qualitative and quantitative evaluation can be helpful; for example, Morningstar has developed a range of due diligence score cards to help review funds through the same lens and provide a measure of consistency.
But it also means advisers must themselves be consistent and compliant when they make a fund recommendation, and ensure that client information is kept up to date to ensure suitability at all levels: product and personal recommendation.
It comes back to a point made by CMS’s Ms Altkemper, who adds: “Changes in firm’s processes and procedures will be needed to ensure that client information is reliable and up to date, so that periodic suitability reports can be generated for clients who receive ongoing advice.”
Red flags
The greater information available to advisers to use in assessing a fund’s suitability for their clients will also mean there is a subtle shift in focus from product sales to investor suitability.
This could eventually lead to a contraction in the investment market that works in the adviser’s and client’s interests.
For Ms Beard, this means certain long-standing but unnecessary share classes – particularly legacy ones where poor performance and high fees have a doubly detrimental effect on the investor – may end up being closed.
She says the greater openness means advisers will have a better audit trail to see whether the funds have been delivering value for money and doing what they have set out to do.
“If advisers monitor the funds and a flag is raised about a fund consistently showing up as poor quality, advisers have the right to make a noise about it.
“There are too many funds sitting around that serve no purpose.”
Fitz Partners research into ‘twin share classes’ – where the share classes of a particular fund are identical in every aspect but the management fee and performance fee – has found some funds could have an average discrepancy of up to 26 basis points when it comes to the management fee.
The research suggests that where a performance fee is added onto the management fee, the provider on average puts a discount on this share class, meaning products whose ongoing charges include management and performance fees could be cheaper by 19 basis points than funds which only have a management fee.
Such discrepancies are confusing and illogical for investors – and Mifid II should go some way to cleaning up such legacy pricing structures.
Ms Beard reiterates this point in her research note, Mifid II: It's Not Just an Equity Research Issue: Understanding the Fund Reporting Requirements, in which she comments: “Some funds have less relevance in today’s investing world. Notwithstanding the fact costs would be involved in fund closures, there is complacency among asset managers.
