A sum of no less than DKK 836.5 billion in total (EUR 112.5 billion) sits in deposit accounts in Danish banks. Despite an interest rate that is often zero, and thus lower than the rate of inflation, and the fact that banks and mutual funds across the country have long had an eye on the money, the total amount has grown steadily year after year.
But now the investment industry will receive help from the outside: The help will come from new EU regulations named MiFID II, which, among other things, serve the purpose of giving Danes a better overview of their expenses and securing that they get value for their money when paying for investment advice.
"Instead of keeping each household's money in an account, they could be used for investing. But in order for that to happen, we need much more trust from our customers, and MiFID II can hopefully provide that," says Anders Klinkby, Head of Investment and Savings at Finans Danmark, in an interview with FinansWatch.
The amount currently in Danish deposit accounts roughly equals the amount that has been invested via mutual funds, which is DKK 853 billion. That measures up to about 15 percent of all Danes – 831,000 people – have invested in at least one mutual fund.
Big challenge in customer dialog
MiFID II is an EU directive that will be implemented into Danish law in two phases.
The first part takes effect on July 1, and already during this stage, Danish investors should get more insight into their expenses.
"There's no doubt that some customer dialogs will be challenging when the actual expenses become clear," says Klinkby.
Until now, the Danish investment industry has been operating with the key figure APR (Annual Percentage Rates), but from now on investment customers will be presented with their investment expenses in straight numbers.
Yet customers will also be subject to other expenses in each fund – expenses for administration and investments, which will eventually be deducted before the returns are finally transferred to the customer's account.
"It's logical that the bigger the fortune, the bigger returns, and the more questions we will get from some people. But why do I have to pay for that? And why does it create value for me? That's always a healthy and important practice to be able to account for," Klinkby explains.
Goodbye to billions in agency commission
As part of the measures to increase transparency, MiFID II includes a ban on the so-called commission payments. About half of all Danes' investments in mutual funds are made via portfolio agreements where the bank invests with a proxy from the customer, and this area will see major changes.
From July 1, banks are no longer allowed to receive commission payments from mutual funds when the bank uses the mutual funds’ funds in portfolio agreements. This means that banks are losing this income.
In 2014, a report showed that Danish banks received a total of DKK 3 billion annually in commission payments from banks, and if half of this comes from portfolio agreements, the banks are losing half of this income source – unless they choose to charge the payment from the customer in the form of payment for advice. According to the report, Danish investors paid 0.57 percent in commission on average.
Danske Bank and Nordea, among others, are planning to do this.
"The contents are the same, so our prices are staying the same. But we will, of course, keep within the law, and we have been working to improve transparency for our customers," said Sune Worm Mortensen, Head of Wealth Offerings at Danske to FinansWatch last week.
As previously reproted by FW Asset Management, other banks have chosen to move their customers from portfolio agreements to other solutions, such as fund-of-funds solutions – where it is still legal to receive commission payments.
Advice must create value
From Jan. 1, 2018, the rest of MiFID II takes effect, and for private investors this means that there will be new, tightened requirements for investment advice. If a customer buys investment advice, e.g. via e-bank, or via phone call or visit to the bank, the mutual fund will still be paying commission to the bank.
For this reason, MiFID II will set requirements for the quality of the advice – it must be "quality enhancing". The exact definition has not yet been published, but it could for example mean that the bank offers investments in a wide selection of funds – also from mutual funds that are not owned by the bank itself. Quality enhancing service could also imply that the bank provides online advice services.
"Of course it will be challenging to clearly show the value creation in the advice. It requires training, and I think it's fair to say that the sector has not previously done enough in this regard. Much of the value creation is exactly about advice and investing or not investing," Klinkby says, adding:
"And whether you have a proper investment portfolio with good risk diversification. This makes the difference between having money to spare when you reach an old age, or not having that."
Advice still in demand
Klinkby believes that Danes will continue to want advice, even when they know what it costs.
"When asked, 9 out of 10 Danes who use mutual funds say that they will still want investment advice. Among other reasons, this is because many are not sure what an equity and a bond is, and how you build a proper investment portfolio – they need help for that," says Klinkby.