Ms Beard agrees such checks should be made annually or semi-annually, and documented as part of regular reviews.
She points to chapter three of the Delegated Directive – the Commission Delegated Directive (EU) 2017/593 – on investor protections.
“This requires investment firms of member states to check whether their own funds are still fit for purpose for today’s investors and that they offer good value,” Ms Beard adds.
Any advisers running in-house investment portfolios will fall within the scope of this directive; even if advisers do not run their own funds, it is best practice to check that a third-party manager’s funds are meeting those requirements.
Morningstar’s list of what you should check for:
- Does the product function as intended?
- Is it still fit for purpose?
- Is it offering good value?
- Do the managers/advisers review products when they become aware of an event that could materially affect the potential risk to investors?
Ms Watts states there is a “heightened obligation” on financial advisers to understand their clients’ objectives and circumstances under suitability.
To help do this, she advocates “replaying those back to the client before (or immediately after) investment, and thereafter periodically".
“This is the essence of knowing your client and ensuring you are acting in the best interest for the duration of your relationship with them.”
Onus on distributors
Investment advisers, wealth managers, discretionary fund managers and those distributing funds have specific duties for due diligence and record-keeping under Mifid II, as laid out in chapter 3 article 10 of the Delegated Directive.
As Ms Gibson says: “Mifid II’s additional suitability requirements provide an opportunity to improve client servicing and advisory services.”
For example, wealth advisers must consider whether the product manufacturer has paid enough attention to the following three areas before recommending a fund:
1) Product governance: The directive states: “Member States shall require investment firms to have in place adequate product governance arrangements to ensure the products and services they intend to offer or recommend are compatible with the needs, characteristics, and objectives of an identified target market and that the intended distribution strategy is consistent with the identified target market.
2) Client circumstances: “Investment firms shall appropriately identify and assess the circumstances and needs of the clients they intend to focus on, so as to ensure that clients' interests are not compromised as a result of commercial or funding pressures. As part of this process, firms shall identify any groups of clients for whose needs, characteristics and objectives the product or service is not compatible.
3) Product and audience knowledge: “Member States shall ensure that investment firms obtain from manufactures that are subject to Directive 2014/65/EU information to gain the necessary understanding and knowledge of the products they intend to recommend or sell in order to ensure that these products will be distributed in accordance with the needs, characteristics and objectives of the identified target market."
