Next year in January, the European regulation MiFID II becomes effective. MiFID are the initials of Markets in Financial Instruments Directive. There was already a first version, but the evolution of the market and the interest of the European institutions to protect individual investors promoted this second chapter.
What does it mean? Actually, the regulation improves transparency in the markets and prices, promotes lower costs and strengthens investment protection. For instance, what investors’ protection refers, it makes heavy emphasis in communication, disclosure and transparency. The supervision is also reinforced and put the focus in management and governance in financial entities and markets.
MiFID has a high complexity, but we wonder: what will it happen if we invest through a roboadvisor? Will these platforms avoid the regulation? No, in any case. Automation does not mean at all that roboadvisors will protect less their customers. On the contrary, roboadvisor promote lower costs, standardization and transparency.
We have to consider that there are several kinds of these platforms: form full automatic services to others where there is a platform with human active management. This diversity is not linked with different levels of protection, because all of them must comply with the suitable tests to check the investment ability and knowledge of the customers and they have also forbidden retrocession if they are independent. What does it mean? In short, independent roboadvisors will not be able to sell financial products from other entities (for instance, mutual funds) to obtain a sales commission. Well, let’s explain this a bit more: if you sign up in the roboadvisor XYZ, which reports as independent, it is engaged to sell the best products depending the investors’ profile: the best from any entity. If the roboadvisor is not independent, it has to be very clear that it sells from specific entities and receive a retrocession for any sale.
Roboadvisor are platforms, but there are people behind that create portfolios. These people must have specific studies, following the rule. But the most important effect is the transparency in costs: roboadvisors (as human advisors) will have to report with details about any costs. These costs will have to be listed, not accumulated. In this part, roboadvisors are far away from human advisors. One of the first thing that you find in roboadvisors websites are the amount that you have to pay for the management, because they have very clear their advantages against traditional models.
As you see, MiFID will regulate much more to protect investors. It was developed with several learning from the crisis and from the recent fintech solutions. It tries to order these new systems and they have to accept regulations. If roboadvisors wouldn’t accept MiFID, what credibility would they keep when they say that they are transparent?