MiFID II – Suitability and Appropriateness

MiFID II has implications for obtaining, interpreting, processing, presenting, and recording information about investors and investments when giving financial advice.

Why MiFID II is an opportunity

Handled poorly – reactively rather than proactively – there’s a danger that the requirements in MiFID II are perceived only as an additional regulatory burden. Handled well, however, it is a great opportunity to not only tighten up and future-proof internal procedures, but also enhance existing client-facing activities.

It should also increase both the investor’s and the adviser’s confidence in the advice support structure. Just as doctors need checklists and chefs need scales to support their expertise, so advisers and planners need a reliable, robust, and repeatable set of suitability support tools.

 

How to take advantage

The key to meeting the long list of MiFID II requirements is simple: ensuring that compliance is all about investor insights.

That means better insights into their financial, psychological, and emotional situation; better evidencing of those insights; and better presentation to investors of how recommended investments are suitable for them.

Building the right support tools into the advice process helps to efficiently – and often automatically – create an investor profile that can be suitably matched to an investment selection.

 

Rising to the challenge

Meeting the challenges of MiFID II requires a set of scientific tools that work with existing adviser skills in obtaining, interpreting, processing, presenting, and recording information.

Here are the five key challenges faced by advisers, and how they can be overcome using Oxford Risk’s suite of suitability tools, which take a scientific and behavioural approach that provides consistent investor insights throughout the advice journey.

  

Challenge Requirements Solution

Producing reliable and robust evidence of the outputs of an ongoing planning process using a structure built for upfront sales and in-person explanations.

Smoothly meet new reporting requirements with IT systems designed without these in mind.

Evidence ongoing suitability assessments as easily as standalone product recommendations.

Change company culture.

 

Oxford Risk builds suitability tools into the advice process, rather than bolting them on, to provide ongoing and automatic assessments. This recognises that profiling is a process as dynamic as the investment journey itself.

Collecting information from – and engaging clients with – a planning process they’re not used to.

Encourage disclosure of all assets, not just those under management.

Inspire deeper engagement during meetings.

Make requests appear ‘valid, reliable and simple’ and not look like their main aim is legal protection for the adviser.

Oxford Risk’s risk capacity and emotional comfort assessments encourage engagement by drawing clear links between the investor’s financial circumstances and personality and the outputs of their planning.

Evidencing the reasoning, consistency and timing of the advice process.

Ensure that the tools for assessing suitability are themselves suitable.

Quantify an ability to bear losses or account for fuzzy goals.

Meet the requirement for a clear mapping between risk profiles and portfolios.

The risk capacity assessment   provides a framework for a lifetime’s worth of re-prioritisation amid the planning.

The Oxford Risk mapping process, robustly quantifying and linking risk tolerance and risk capacity to suitable portfolio risk ranges, is unique in the industry.

Evidencing the understanding of the risk an investor is willing and able to take, as well as their emotional attitudes to risk and how these evolve over time.

Present the difference between short-term portfolio risks and long-term planning risks.

Model potential ranges of outcomes.

Account for changes in both the investor and the plan, and record these effectively.

Oxford Risk’s set of suitability tools is unique in being able to reliably and robustly cover both risk tolerance and shorter-term behavioural traits, and to combine these with an appropriately quantified measure of the investor’s changing financial circumstances.

Ensuring investors understand what’s reported to them, whatever their level of financial awareness.

Determine different levels of investor understanding when communicating with them.

Tailor reporting content and frequency to different investors to best serve their needs.

Ensure the investor has understood the advice.

Oxford Risk’s ongoing assessments see each investor interaction as an opportunity to enrich the client profile and tailor future communication accordingly, providing an ongoing feedback loop for enhanced understanding and engagement.

  

 

Summary – what you really need to know about MiFID II and suitability

  • MiFID II presents an opportunity to support the art of financial advice with a future-proof scientific framework that works with – and better evidences – the adviser’s existing skills.

  • Whether suitability tools are integrated into the advice process or merely bolted on will likely be the difference between successful and unsuccessful adoption of the regulations. 

  • MiFID II does not so much present challenges of providing suitable advice as challenges of evidencing and presenting a suitable advice process to both the regulator and the investor.

Compass Suitability Toolset