At the end of February 2014, the AFM published the results of her market-wide research into the quality of investment services provided by banks and investment firms. According to the AFM the quality of some parties is adequate to good, while for the majority of parties investigated, this still needs to be improved.
The following 3 points for improvement have been identified by the AFM.
|Investment frameworks are lacking in many cases|
|The AFM notes that the majority of the parties monitor in particular on the basis of return and pay scant attention to the risks and costs of the portfolios. The AFM also notes that most parties do not (or cannot) make a structured consideration between risk, return and cost parameters in the selection of financial instruments, because these parameters have not been set down and/or measured.|
|Customer inventory and updates deserve more attention|
|Many of the investigated parties only use a questionnaire when making an inventory of the customer profile. The AFM notes that the information obtained is often not thorough or concrete enough. In a large number of cases the AFM finds the information present insufficient to warrant an adequate service. In addition to the lack, in the eyes of the AFM, of (sufficient depth and concrete) information regarding the financial position, investment objective, knowledge and experience and risk appetite of the customer, the AFM concludes that the files often also fail to make clear whether the data known to the company is still actually up-to-date.|
|Better identification and guarantee of suitability|
|During its research the AFM looked at the way in which the inventoried customer profile is translated into an appropriate investment portfolio. To do this many companies use a risk profile often with a model portfolio with specific bandwidths for investment categories. The AFM notes that for only one third of the examined files did the investment portfolio suit the customer profile. For one third this suitability was absent according to the AFM, and for the remaining third important customer data was lacking as a result of which the suitability could not be established|
The AFM defines quality of investment services as the extent to which companies make an inventory of relevant customer data, translate them into concrete investment solutions and consequently monitor them. This quality, as far as the AFM is concerned, appears to be inadequate.
| The AFM has clearly stated in several guidelines its vision of what qualitative investment advice and asset management means. These guidelines offer a mirror for comparing your own approach:
The manner in which the process of identification and interpretation of the investment portfolio is organised should ensure that you make in as far as possible a quantitative and objective suitable match (that you continue to ensure that it is appropriate) between the customer profile and the investment portfolio.
The service cycle as previously outlined can be subdivided into 3 main phases:
- Customer profile. Inventory of (relevant) customer data (phases Introduction and creating a profile)
- Investment policy. Translating customer profile into concrete investment solutions (phase Solution)
- Monitoring and updating. Monitoring customer profile and investment portfolio (phase On-going aftercare)
Improving the quality of investment services begins with a structured illustration of how you organise these phases at the current time.
|Fase 1: Inventory of relevant customer data|
For both new and existing customers the investment company must have information on at least the following aspects:
|Objective and horizon||Financial Position||Risk appetite||Knowledge and experience|
|What does the customer need this capital for?
Are there other important objectives?
How much does he need?
When does he need it?
|Income and expenses
Property and debts
|Is the customer prepared to lose (a part of) his initial investment?
Which part of his initial investment?
What chance of not reaching his objective is the customer willing to accept?
|Open questions that provide insight into the customer’s experience and knowledge
|Source: AFM-Leidraad zorgvuldig adviseren over vermogensopbouw (2009)|
The way in which this inventory is carried out is format free. You are therefore not required to use a (written) questionnaire or to have the customer sign an inventory form. You are obliged however, to obtain sufficient concrete information.
When making a target inventory a ‘general asset accumulation’ is often indicated. However, more often than not, there is a more concrete goal and investment horizon. Ask control and follow-up questions to determine the targets as concretely as possible.
When making an inventory of the financial position more than just an inventory of the investable assets is required. It is also important that you gain sufficient insight into both the current as well as the periodic financial liabilities and revenues.
When making an inventory of the risk appetite, this needs to give insight into the risk the customer can and is willing to accept. The financial position, objectives and investment horizon also need to be taken into account. This needs to be depicted as quantitatively as possible.
Knowledge and experience
When making an inventory of knowledge and experience it is particularly important that you use this information to get the nature of your service and your communication to match the customer.
|Fase 2: Investement policy|
You base your appropriate advice or content of investment portfolio on the complete customer profile. In doing so you choose an asset allocation that matches the customer profile. The investment portfolio must therefore at least fit the objective, investment horizon, financial position and risk appetite of the customer.
It is sensible to set out how you generally shape your investment policy or how you normally compose an individual investment portfolio. This so-called investment policy should at least provide insight into:
- the target group (s) of your investment firm;
- the investment style or styles within your company;
- the possible use of default risk profiles;
- the range and choice of financial instruments.
It is important to have a concrete and as objective as possible view of the return, risk and cost characteristics of the financial instruments available for selection. This process needs to be well documented. Practically speaking this means you need to make it clear in your investment policy, which portfolio your customer has for which situation and which considerations generally play a role.
|Fase 3: Monitoring & Updating|
You have regular contact with your customer and both as a result of your services (transactions, mutations) and of developments in the financial markets, the value and composition of the assets change, sometimes causing the original objective to be lost from view!
Of course the personal situation of the customer can also change causing (for example) a change in his/her objective or financial position.
Updating customer profile
If you have regular contact with your customer, make sure you are alert to any relevant changes, in particular changes in financial position, objective and risk appetite, which need to be taken into account for your advice or management. Do keep track of these things in reports, even when there are no relevant changes.
Many companies limit the monitoring of the investment portfolio to the return on investment. There is often insufficient monitoring of the match between the investment portfolio and the original starting point arising from the customer profile, or of the possibly of change in stance with regard to the starting point (or for instance whether the original objective can still be realised in view of the remaining investment horizon, historical events and realistic expectations).
AFM Guidelines are not regulations but a mirror
The Guidelines of the AFM are not laws or regulations, although they sometimes get increased status due to judicial rulings. However the AFM did not intend them as such, but as a tool to give the sector concrete instruments with which to adequately organise your service process. Therefore we recommend you to interpret the guidelines as such, namely as a mirror for your own processes.
The minimum level you must comply with is determined by the framework of the Financial Supervision Act (Wft) and the accompanying secondary legislation (Decree on the supervision of the conduct of financial enterprises and further regulations on the supervision of investment companies). The Guidelines of the AFM can help you set up and/or further improve your business operations.
MiFID II sets higher standards (again)
In the meantime, the contents of the new European directive on investment services, MiFID II, are also known. The European Parliament has just recently agreed to the proposed text of the directive, and both the directive and the corresponding regulation are now finalised. The implementation of MiFID II in the Dutch legislation will take place at the beginning of 2017. For investment firms this means, among other things, that a more concrete obligation will be introduced regarding the demonstrable suitability of advice and obligatory communication of the suitability of every transaction to customers.
Sounding board for the improvement of your investment services
We follow the European and Dutch legislative developments and also the vision of the AFM (among other things in relation to the ban on commission and the payment model used by investment firms). We can translate the current and future requirements to your unique situation in a way that not only ensures that you are compliant, but that is also as pragmatic as possible. In doing so, we also monitor consistency with other legislative trends such as EMIR and AIFMD.
For more information please contact us at our general phone number 020-4165403 of via e-mail: firstname.lastname@example.org