- On February 20, 2018
You can be forgiven for not keeping up with the endless stream of rules and regulations emanating from the EU so I thought for this week’s column I’d highlight some new laws that came into force this month which directly affect your investments.
They’re contained in what’s called MiFID II (Markets in Financial Instruments Directive) and extend a series of directives implemented in 2007 aimed at creating a more consistent system of regulation of investment services across the 31 member states of the European Economic Area, together with improving competition and consumer protection.
While the majority of these directives apply to financial institutions, there are areas that relate directly to private clients. And one in particular needs highlighting as having the potential to cause significant issues further down the line – 10% depreciation reporting.
Prudent investing requires a managed degree of risk together with time and patience to make it work. But what MiFID II does is introduces a requirement that everybody who runs discretionary portfolios has to report to their clients if their portfolio falls by 10%.
As a financial adviser with 30 years’ experience this is counterintuitive to what is the perceived wisdom in investing, ie when I talk to clients I say to every one of them that if you’re thinking short term and worried about the month-to-month fluctuations in investments then don’t invest.
Now, people who are sensibly following advice and taking the long-term view will suddenly be confronted with something that’s likely to cause panic, but had they not known about it, it would have just eased itself out in the wash over time. It’s introducing worry where it need not be.
Assuming everyone is investing on the right basis and they understand the possible highs and lows of performance on a year by year basis, which they should do if they’ve got a good Independent Financial Adviser, why are they suddenly required to have reports sent to them which will put the frighteners on them by telling them their portfolio has fallen by 10% in a quarter?
In my opinion this is unnecessary meddling and I would question the value it’s going to provide. All that’s going to happen is that some people will worry and phone their pension provider and say ‘It’s gone down in value and I can’t stomach the 10% drop so I want you to sell this.’
But what you’ll find is that next week their investment is up 10% and what have they done? They’ve lost 10% of their money.
The new regulations will force people to look at the short-term outcome but my advice to anyone who receives one of these notifications is to hold fire. If you’ve been given good financial advice you might not be pleased about it but you will have expected it.
Ordinarily, a client will only review their investment once a year and all sorts of stuff has gone on during that time. They might look at their portfolio and find that it’s gone down by 5% or it might have gone up by 5%. They don’t need to know the bits in between because what we’re actually looking at is a goal that’s many years into the future.
The money they need in the short terms is where it ought to be – in cash, so why do they need to worry about short-term cycles affecting their long-term investments?
The overarching intention of MiFID II is to make sure that clients are well informed which is laudable to an extent but you have to be pragmatic about it and ask what the eventual outcome of this will be.
In my view the outcome will be that people who are susceptible to scare stories about the markets and have lost sight of their long-term goals that are reinforced by their financial adviser each year may take knee-jerk actions which will cost them a lot of money.
When you’re investing the aim is to buy low and sell high. You don’t sell low and buy high. Once you’ve sold you’ve crystallised the loss – the money has gone.
The only way you’d get the money back is if the market continued to fall and you bought at an even lower price, but trying to time the markets like this is a mug’s game.
But will these new regulations disappear with Brexit I hear you ask? The answer is no, we’ll still adhere to them. There’s too much change involved to rewrite them just because we’re leaving the EU. That’s not to say they won’t be reviewed over time though.
Remember, the value of your investments can go down as well as up. Past performance is not a reliable indicator of future outcomes.
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