Money Managers See Risk of Market Panic From MiFID RuleBy
Rules to require money managers to flag declines to clients
Firms say warning letters could accelerate investor panic
Your wealth manager just sent you a note saying your investments are down 10 percent. Will you run for the exit?
That’s what some firms warn could happen on a large scale when new European rules come into effect next year requiring them to inform clients by the end of the business day if their portfolio lost that amount, and each time it falls another 10 percent. Fund managers worry that the new rules, rather than making markets more transparent, could quickly turn turmoil into panic.
“Warning non-professional investors straight away that the market is falling would only do one thing -- it makes it fall further,“ said Jean-Marie Catala, deputy chief executive officer at Groupama Asset Management, a Paris-based firm which manages 102 billion euros ($120 billion).
The mandatory notices are a little-known provision of the revised Markets in Financial Instruments Directive, or MiFID II, which also forces asset managers to pay separately for research and trading. Proponents say the notices will help clients stay better informed and act in a timely manner. But investment managers, facing added expenses and potentially the loss of fees, warn that individual investors could panic and amplify market swings.
11 Trillion Euros
The provision will apply to some 11 trillion euros that are managed in discretionary mandates, structures where the investment manager decides for the client when to invest in what assets. Almost half of the funds overseen for clients in Europe are in such accounts, according to the European Fund and Asset Management Association.
The proposed rule requires warning letters to be sent whenever such a portfolio declines by 10 percent or more from the last quarterly report. Guidance has yet to be given about whether the information needs to be received by clients on the day the warning is issued.
To illustrate just how many such notices would be sent in a crisis, Killik & Co., a London-based private wealth manager overseeing 5.5 billion pounds ($7.25 billion), charted a hypothetical portfolio worth 100,000 pounds invested in the FTSE 100 Index during the financial crisis. The result: six warnings from the onset of the slump to the start of the recovery.
“If you took the correction of the market during the credit crunch, there would be so many reports made to the client during that period that they might suddenly be scared out of the market,“ said Clem MacTaggart, chief operating officer at Killik & Co.
The firm says that in a severe bear market, the vast majority of its clients do not want to be told that the value of their portfolio is falling and do not access their online portals, because they view themselves as long-term investors.
Of the 11 trillion euros in discretionary mandates, only about 27 percent are run for individual investors, with the rest being institutional assets, according to EFAMA. Institutions such as insurers tend to be quicker to react to real market threats than individuals, who often follow trends when it’s already late. Proponents of the MiFID provision say it may help those investors make better decisions.
“Having some warning that your portfolio is falling may be quite useful for investors,” said Roger Lawson at ShareSoc, which represents individual shareholders in the U.K. That’s especially true for investors who“leave their portfolio managers to run their assets and don’t look at them from one month to another.”
The European Commission declined to comment on the warning letters. A person familiar with its views on the matter said managers should use the letters to explain the reasons for the portfolio depreciation and suggest possible strategies to counterbalance the trend.
"It’s a typically pro-cyclical reaction from the regulator when it should be contra-cyclical," Catala said.
Asset managers have some leeway to present the information to clients in a way that doesn’t create anxiousness particularly for long-term investors, the AMF, the French financial regulator said in an email.
The French trade association for asset managers, AFG, which had lobbied to change the MiFID provision, is now working on a letter that its members can send to clients, explaining that the alert shouldn’t be seen as a warning but an invitation to get in touch with their adviser, said Rajaa Naffeti, a legal adviser for the trade body.
Kleinwort Hambros, the U.K. wealth management arm of Societe Generale SA which oversees 16 billion pounds, says there is a low probability of having a mandate fall by 10 percent, unless there are external shocks such as Brexit or the victory of Donald Trump in the U.S. presidential elections.
“Managing expectations and being proactive with your client base is more important” than just sending loss warnings, said Mouhammed Choukeir, chief investment officer at Kleinwort Hambros. “For some clients you have to say, hold the course since it’s in line with the risk of our strategy. For others, it may be too much -- time to change.”