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Avaloq Blog

How the risk-based portfolio approach supports client centricity - or does it?

Increasingly, financial advisors have to determine which category their clients belong to. This blogpost shows how MiFID and FIDLEG guide wealth managers towards a more client-centric approach.

The current wealth institutions have very limited systematic knowledge of their clients, most of their information comes from the relationship between the Relationship Manager (RM) and the client. Data analytics is not yet fully embedded in the wealth culture. Today's retail banks know more about their clients' patterns, behavior and lifestyle than private banks, mainly driven by credit card utilization analysis. Institutions that can combine this wealth of personal and behavioural information with investment patterns and client habits will be better positioned to understand the next generations.

Download the whitepaper from Luxoft and Adviscent:
Achieving 'Value at Scale' 

These next generations that are tech-savvy and often self-directed will account for 75% of the global income by 2025. Wealth institutions need to invest time to better understand what is coming. All this research has to be done on facts and historical data, an untapped source of knowledge. Data Analytics might just be the tool to boost this understanding, but technology solutions won’t be enough, a cultural shift is required in the wealth managers to embrace the technology and drive the change. KYC should become UYC: Understand your client.

The requirements of MiFID and FIDLEG

When it comes to clients, the European standards of MiFID and Swiss standards or FIDLEG have come with new requirements over the past few years, a key aspect of which is client categorization. MiFID has three main client categories:

Eligible counterparties

This category includes MiFID investment firms and certain types of credit institutions as examples, as well as those who are "opted up" on the basis of their experience and expertise. A firm may only treat a client as an eligible counterparty in relation to eligible counterparty business, e.g. dealing/arranging activities.

Professional clients

This category includes credit institutions, investment firms and collective investment schemes as examples, as well as “opted up” retail clients.

Retail clients

This category includes all other clients who do not fit into the categories listed above.

Client categories help determine the level of protection that is needed in accordance with investment types. For example, financial advisors will have to determine – and document – which category their clients belong to and which products best meet their needs. As a result, providers of financial products have to determine target markets for their products. Subsumed under the term “product governance”, these new requirements ensure that financial professionals work in their clients’ best interests, away from sales-based approach and the conflict of interests it generates.

New perspectives

Under regulatory watch, wealth managers are reshaping their business models away from a product-centric towards a more client-centric approach. Wealth managers have recognized that they cannot tell clients what to buy without respecting the clients risk profile. This is a major shift of perspective, which is clearly beneficial for clients.  Nevertheless, there can be unintended consequences.

Achieving 'Value at Scale' with Digital Advice and Enhance Client Engagement

This joint working paper from Luxoft (a DXC company) & Adviscent highlights some of the limitations for clients of the implementation of these new regulatory compliant approaches, and considers how technology innovations could help provide clients with better investment options and service.

 

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  • improving efficiency
  • how to overcome the challenges of using digital advisory models
  • establishing a dialogue between the advisor and the client