With the ESG-focused principles of MiFID II regulation coming into force, wealth management firms need to be prepared for its impact and how they can future-proof their investment processes.
everyoneINVESTED has released advice on how companies can transform their ESG compliance into commercial performance.
Firstly, it said that not missing the deadline is not an option. Financial institutions are rushing to meet the deadline but will need to be ready to “shift gear” when regulators release additional information on level 2 guidelines.
Firms will need to have their ESG questioning ready and the translation of their advice into portfolios and reporting.
It said, “Avoid disappointing your client in case of unrealistic preferences with a clever onboarding journey without biasing your client. Insights into behavioural finance become instrumental.”
Secondly, it said that many firms are taking shortcuts and redirecting clients from a digital environment to branches, helpdesk or they use “Sorry-we-can’t-service-you-flows.” everyoneINVESTED stated that these shortcuts result in unhappy flows from the client and bank perspective.
Services are normally designed, with MiFID being an afterthought, but this is not the best way of operating. It offered three design tips, “Make sure that what you write appeals to all types of clients you cater to, meaning both the believers and the non-believers. Start with why to get them hooked, and don’t forget to explain the choices, and above all, do not overdose.”
Next, everyoneINVESTED outlined the commercial opportunity. It stated that upcoming EU sustainability regulation could offer a lot of opportunities. Sustainable investments have encouraged young people to invest and the ESG guidelines will only strengthen their resolve to invest by favouring sustainable businesses.
As a result, the investment process and product link need to be clear and straightforward so investors can see their meaningful impact.
As for traditional investors, the regulation could be counterintuitive. everyoneINVESTED stated that some clients might turn to less complex execution-only investment processes. Others might not grasp the impact of their choices and use solutions that do not meet their expectations.
“ESMA leaves a way out for the clients who don’t want to go into too much detail, especially in a live advisory context. Once the clients indicate they have specific preferences, they are not obliged to specify them. So, for example, they may have a good idea about which product types they allow in their investments but don’t have any minimum proportion preference.
“If you want to give him this way out, you must explain the fallback scenario for those clients with apparently, after all, not-so-specific preferences. It might be hard to include this fallback option on your backend, but avoiding unhappy clients is worthwhile.”
To find out sustainability preferences firms should be using self-assessment. While there are questionnaires that could do this, everyoneINVESTED believes behavioural insights are a great technology to leverage.
Finally, everyoneINVESTED stated that firms need to ensure clients are not put off by questionnaires. This means they need to leverage smart processes. It said, “Clear communication, behavioural insights, and smart default settings will play an instrumental role in achieving high conversion rates.” It claims that Behavioural design of processes has resulted in 80% conversion and 99% satisfaction rates.
everyoneINVESTED concluded, “We have already proven that it is feasible to turn compliance into commercial performance using behavioural technology. When assessing the ESG preferences of a client, behavioural technology will undoubtedly help to digest the complexity of all the choices the clients need to make. Technology will be essential at all stages of the chain, from profiling to advice, from portfolio matching to reporting.”
Read the guidance here.
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