Will retail investors be left without proper advice? Or will the new EU directive MiFID II open up a world of new and better opportunities for those investors with more limited means?
AMWatch has spoken to the chief executive of Bankinvest, Lars Bo Bertram, and Troels Holdberg of the Danish Consumers' Advisory Council Tænk, and the two men are at odds on the issue.
"It's downright harmful to society. It's an open clash with the solidary cost structure where investment customers with limited funds had access to affordable advice, while wealthier customers paid more," says Lars Bo Bertram to AMWatch.
The purpose of MiFID II is to give investors more insight into the expenses related to their own investments.
However, the EU directive, which took partial effect on July 1 and will be fully implemented in Danish law from at the turn of the year, will also make it less attractive to provide advice to retail investors, which is exactly what mutual funds were created for, says Lars Bo Bertram.
"If you are a customer with DKK 100,000 (EUR 13,400) and you pay one percent in expenses, you're paying DKK 1,000 a year. This means that you can only receive DKK 1,000 worth of service a year from your banking consultant. That is basically what MiFID II entails, and DKK 1,000 doesn't cover much of the bank's expenses," he says.
Not the intention
On July 1, banks were no longer allowed to receive commission payments from mutual funds in relation to portfolio and proxy agreements between bank and customer. Instead, the bank may choose to bill the customer for the missing income. Danske Bank and Nordea, among others, have picked this solution, and, as AMWatch has previously described, this might result in higher expenses for individual customers.
"I don't know if a bank charges DKK 1,000 per hour for advice, but it's in that range. Furthermore, the bank provides access to an extensive machinery of IT systems and such, which also costs. But in reality, a customer who only has DKK 50,000 can actually no longer afford service if the bank is to cover just a few of the expenses," says Lars Bo Bertram.
He is frustrated that MiFID II has these consequences.
"This was not the intention. The intention was for customers to know what expenses they are paying for, and to make sure that they get their money's worth," Lars Bo Bertram says. He emphasizes that the original purpose of Danish mutual funds was to give retail investors the opportunity spread their investments by investing together.
"The issue is quite relevant, because mutual funds were originally made for customers who were too small to invest by themselves or had no interest in it," he adds. The Danish Financial Supervisory Agency (FSA) and CFA Society Denmark held a conference in June, titled "The investment market in transition", at which the Danish FSA made clear its disapproval of banks charging the same percentage rate from both millionaires and customers with only a few thousands to invest.
The Danish FSA will initially gauge the sector's reaction to MiFID II by through focused inspections, and says that it will give enforcement orders, if relevant.
Robin Hood effect
Troels Holberg, senior economist at Forbrugerrådet Tænk, a consumer advocacy partly funded by the government, does not at all share Lars Bo Bertram's concern.
"We have heard this argument time and time again from the asset management industry – don't squeeze the price, small customers will get the worst of it. The high fees have a sort of inherent Robin Hood effect because wealthier customers help pay for those of limited means," Holmberg says to AMWatch.
Instead, Forbrugerrådet Tænk expects MiFID II to result in far better opportunities for small, private investors. In the US, investment consultancy rules have been reformed to allow customers to see all expenses, and commission has been banned, just like it will be in Europe under MiFID II.
"The result in the US has been a lot of new providers, less expensive and with no lower limit for the customer's wealth. This is why we take the opposite standpoint – we see opportunities to come for retail investors," Holmberg says.
"I don't believe that Danish banks will start kicking out customers – and if they do, there will be other players more than happy to take them in. At least that is what happened in the US," he adds.
Mom can't consult herself
The past few years have seen new, less expensive solutions. Danske Bank launched an affordable investment solution, June, which helps customers invest even small sums in passive funds, and Nord Investments offers investment costs starting at 0.75 percent when the customer puts up at least DKK 30,000. Bankinvest is also working on a self-service solution named Darwin, and Nordea just revealed that a fully digital investment solution will be ready for use at some point in 2017.
But according to Lars Bo Bertram, the new solutions can't prevent customers getting caught in no-man's land.
"I don't believe that the self-service solutions will be a problem in 10, 15, or 20 years. But currently, there are many customers of limited means who may also have limited technological proficiency," he says.
"My own 83-year-old mother is a good example. Although she uses Facebook, she can't receive her investment advice online," he continues.
Nobody wants to counsel
Lars Bo Bertram predicts that the money will instead be deposited in bank accounts at interest rates around zero percent and eroded by inflation over time. Already a staggering amount of money is currently sitting in bank accounts – a record-breaking DKK 850 billion, which averages DKK 147,700 per Dane.
"You could say that it does no harm because the money is covered by the depositor guarantee. But these funds are not being invested with the right timeframe and risk profile. So it is basically just a bad investment, and nobody wants to provide advice on the subject," Lars Bo Bertram says.
He also doubts that independent consultants will come to the retail investors' aid, because their required minimum is usually too high for a small investor.
"If you have DKK 100,000, you can't pay DKK 20,000 a year for advice. So there are no consultants to help the old lady with her DKK 75,000. She is on her own, and that is a pity," says Lars Bo Bertram.
Small investors left high and dry
At Plancap, a Danish platform that helps people find independent investment consultants as an alternative to banks, Head of Customer Service, Rasmus Berg, agrees with Lars Bo Bertram's view.
"I recognize the picture of small investors being left high and dry. They are the ones with no more than a few hundred thousand to invest. Neither banks, nor financial consulting services, nor many independent hourly-paid consultants can help them," says Berg.
He says that most investment consultants at Plancap – formerly known as investeringsmuligheder.dk – typically require a minimum investment of at least DKK 400,000-500,000, but some consultants go as low as DKK 100,000.
Holmberg recognizes the minimum investment requirement from some Danish banks – also from before MiFID II.
"Not all customers have had access to portfolio management at larger banks. So despite commission payments being legal, smaller customers have been cut off from services. That is the exact opposite of what the industry claimed was the case," says Holmberg.
English Edit: Mare Honoré