A market downturn sparked by Mifid?

Could Mifid II be responsible pushing markets into a downward spiral? Perhaps not, but a rule requiring managers to report any 10% fall in a portfolio to clients will do little to discourage the buy high/sell low mentality of the man on the street.

Mifid markets

|

Louise Hill

For professional investors who can perhaps look past any short-term volatility, the reports should be of little concern but, as Seven Investment Management (7IM) says, “many private investors have had an unfortunate tendency to buy high and sell low, and this could exacerbate the issue”.

“We don’t think it will force professional investors into short-term thinking, but we think some private investors may be alarmed,” a 7IM spokesperson says.

The firm has devised a system where its own discretionary clients will be informed of any fall in value on the same day by letter, but it will pass responsibility on to the adviser of any clients accessing services via the platform.

Paul Young of adviser support network Zero, wrote on Mifid II late last year that “picking holes in this is relatively easy”.

He raised three key questions about the regulation’s rule, including the potential of panic selling as a result.

“Because the requirement to notify only applies to part of a client’s portfolio, such as the DFM-run element, it could give a misleading message about the client’s overall position. If the client’s total portfolio goes down by 10% there is no requirement to notify,” he says.

“If the portfolio goes down by 9% on 31 December and 9% on 1 January, straddling two reporting periods, presumably no notification is required?” Young adds.

The importance of holding out

Ultimately, as 7IM’s Peter Sleep notes, a bounce after a market fall is the most reliable long-term phenomenon out there and it is important investors do not forget this, or are taught that sticking it out in the investment world is often the best course of action, if not the most emotionally tricky.

Whether Mifid’s 10% rule helps or hinders in getting that message out to a wider retail base remains to be seen, but it is far from the progress needed at a moment when market volatility could shock and surprise.

While transparency should be applauded, forcing too much information on investors could eventually backfire.

MORE ARTICLES ON