The Effects of a Ban on Retrocessions The Dutch case

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Bernadette Wiggins
7 years ago
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Morningstar: Who We Are Chicago Toronto Morningstar Global Operations Mexico City Santiago Sao Paulo Amsterdam Copenhagen Frankfurt London Luxembourg Madrid Milan Munich Oslo Paris Stockholm Zurich

2 Morningstar: Who We Are Chicago Toronto Morningstar Global Operations Mexico City Santiago Sao Paulo Amsterdam Copenhagen Frankfurt London Luxembourg Madrid Milan Munich Oslo Paris Stockholm Zurich Cape Town Dubai Mumbai Bangkok Hong Kong Seoul Shenzhen Singapore Taipei Tokyo Auckland Sydney We re a leading provider of independent investment research We serve clients globally through our presence in North America, South America, Europe, Asia, Australia, and the Middle East Our 3,800+ employees work in offices worldwide, offering local market expertise Since 1984, we ve been recognized for pioneering contributions to the investment industry Our global database includes approximately 446,000 investments 1 #

3 Morningstar: Who We Serve Worldwide Our mission is to create great products that help investors reach their financial goals. We help individual investors, and the institutions and advisors that serve them. Institutions 5,100 institutional clients 8,500+ Morningstar Direct SM licenses $152.1 billion in assets under advisement and management 24 million retirement plan participants with access to our retirement advice services through 237,000 plan sponsors and 26 plan providers Individuals 9.3 million individual investors 124,000 paid Premium Members of Morningstar.com One of the largest independent sources for equity and credit research Advisors 260,000 financial advisors About 25% of financial advisors worldwide have access to Morningstar s solutions $7.3 billion in assets under management in Morningstar Managed Portfolios SM 169,000+ U.S. Morningstar Advisor Workstation SM and Morningstar Office SM licenses Assets under management and advisement as of Dec. 31, #

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5 HISTORICAL CONTEXT 4 #

6 Like many other countries, the Dutch financial sector was badly hit in 2008 Financial sector as % GDP 5 # 2

7 which resulted in the current financial landscape A small number of (big) banks And asset managers that are at armslengths basis 6 # 3

8 Next to that, we had our Woekerpolis Affair Woekerpolis literally means profiteering policy and is the rather telling nickname given by the media to investment- based savings schemes in which between 25% and 86% of the premium is spent on costs (life insurance, commission and other costs) rather than investments. Some 6.5 million of these policies have been sold over the past 15 years. All the big financial services groups offered them and are now busy forking out courtordered compensation to policyholders. In 2008, the financial services ombudsman ruled that policyholders faced with costs over 3.5% of their total premium should get compensation. 7 # 4

It is in that light that the Dutch supervisor In 2009, started asking questions about the desirability of provisions / rebates / retrocessions in financial services (initially mortgages and insurance

9 It is in that light that the Dutch supervisor In 2009, started asking questions about the desirability of provisions / rebates / retrocessions in financial services (initially mortgages and insurance products; later investment products) Main reasons: client interest / consumer protection and transparency (visibility of real costs) Interesting steering mechanisms: guidance papers (legal status?), asking questions, and interviews Goal: regaining confidence in financial sector / culture change 8 # 5

10 Then, in November Kickbacks are a strange phenomenon One reason to get rid of kickbacks: level playing field active-passive instruments Kickback model is not sustainable As of 2011, (Rabobank) investors to pay for advisory services Should be joint project government, supervisor, fund companies and distributors Transparency and level playing field HESTER BORRIE, Board Member of Robeco and PIM MOL, Director Private Banking of Rabobank changed the scene dramatically 9 # 6

11 March 2011: Finance Minister sends letter to Parliament The Netherlands aims to ban commissions on a European level. [...] Should a ban on European level (short term) not be feasible, I will still take national steps to prohibit these commissions. 10 # 7

12 From then on, it was serious business More (private) banks started reimbursing retrocessions to clients (Van Lanschot had already started in 2009) Q1 2013: Gentlemen s Agreement AFM and 5 large banks The Wijzigingsbesluit Financiële Markten 2014 was published in the Staatsblad on Tuesday 17 December 2013 Per 1 January 2014: complete ban on retrocessions in The Netherlands 11 # 8

13 IMPACT (THUS FAR) 12 # 9

14 Explosion of share classes! Fund companies: Introduced new rebate free shareclasses (especially Lux funds), e.g.: Adding new share class I share class N share class R share class Lowered management fees (but not always with retrocession fee), e.g: Opened up Institutional share classes for retail investors 13 # 11

15 This left much to be desired There was hardly any guidance from the supervisor For fund companies, banks and companies like Morningstar this was an administrative challenge Due to this explosion of share classes, investors did not longer see the wood for the trees 14 # 12

16 What did fund companies do? Started own retail webshops 15 # 13

17 What did distributors do (1)? Talked with and (re) segmented clients Execution Only Advisory Services Discretionary Portfolio Management Changed business models / introduced advisory fees 16 # 14

18 What did distributors do (2)? Shift to ETFs? Shift to mandates? Han Dieperink, CIO Rabobank in Financial Investigator, No. 2, #

19 The BIG question: what did investors do? According to a study done by Schroders and TNS NIPO*: Almost 1 out of 5 advisory clients has switched to execution only as a result of the ban on retrocessions Almost 1 out of 5 advisory clients considers switching to execution only Only 4% of advisory clients has switched to discretionary portfolio management *published on 4 November # 15

20 What kind of advisor do investors use? Investment advisor bank 30 Independent advisor 16 Independent financial planner 3 Accountant 2 Miscellaneous 7 No advisor 52 Source: Schroders / TNS NIPO In 2013, 73% of advised investors was advised by their bank advisor; in 2014 only 62% 19 # 16

21 Why do investors not use an advisor? I can do it my self 76 An advisor does not work in my best interest 38 Too expensive 35 I don't trust an advisor 26 Bad experience 15 Miscellaneous 8 Source: Schroders / TNS NIPO 20 # 17

22 Are investors better off? Too early to say Yes, definitely more transparency, and cheaper products On the other side: Investors (that have kept their advisor) now have to pay an advisory fee. Are they really cheaper off? Did investors make the right decisions for the right reasons? Do they have the experience and knowledge to invest on their own experience thus far shows that execution only investors have less diversified portfolios, too much home bias and too much turnover Apparently, that s the price we want to pay for the increased transparency 21 #

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