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The quality of investment services requires improvement - parties take action

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The quality of the investment services provided by some banks and investment firms ranks from sufficient to good. For the majority of investment firms and banks, quality still needs to be improved. This is evident from an investigation into the quality of investment services performed by the AFM in 2013.

The investigation focused on banks and investment firms that offer asset management or investment advice to wealthy investors. The AFM has assessed the client inventories, the appropriateness of the investment portfolios and the investment policies of thirteen firms on the basis of 142 files.

Banks and investment firms have promised to improve the quality of the investment services they provide. Several parties have already implemented improvement measures. The quality of the investment service has become even more important this year, because after the introduction of the ban on commissions for investment firms clients will be paying directly for advice.

Findings of the investigation

The investigation shows that the quality of the investment services of some firms is sufficient, good, or somewhere in-between. At the same time, it is clear that the quality offered by the majority of the firms leaves room for improvement.

Investment frameworks are lacking in many cases.

Sound investment policy ensures that investments do not entail more risk than was agreed with the client and it increases transparency concerning expected risks and returns. With a sound investment policy, firms are better able to select appropriate instruments and to avoid instruments that have little to no added value. It has become clear that the majority of the firms that were investigated have not laid down risk, return and/or cost parameters for the purpose of selecting financial instruments and/or that they do not measure these data. An investment firm cannot make a structured consideration if the parameters are not measured when selecting financial instruments. In addition, the majority of the firms only check investment portfolios on the basis of return. This can lead to the creation of inappropriate portfolios for clients. The investigation also shows that some firms do devote sufficient attention to the parameters for selecting financial instruments and to checking the investment portfolio.

Client inventory and updating deserves more attention.

When performing the inventory, it is very important that firms have insight into their clients’ current characteristics and wishes. A firm can only ensure that its investment advice or asset management is appropriate if it has sufficient insight into these client data. It is evident from the investigation that in approximately half of the investigated files the information concerning clients’ financial position was sufficiently specific and in-depth. In less than half of the reviewed files were objectives, risk acceptance and knowledge sufficiently investigated. The information in several files was no longer current. This creates the risk of the firm not basing itself on the correct client data. Several parties did perform an inventory that was sufficiently specific and in-depth. The client data were up-to-date in these cases as well.

Determine and guarantee appropriateness better

The essence of providing investment services is to issue advice to a client concerning their investment portfolio and its management, given the characteristics and wishes of that client. Several firms can implement improvements by checking whether the investment portfolio is appropriate for the client. The client data and the investment portfolio are in line with each other in approximately one third of the investigated files. Furthermore, it is unclear in approximately one third of the cases whether sufficient account is taken of the characteristics and wishes of the client, because essential client information is lacking. And finally, it has become clear that inappropriate management or advice was provided in approximately one third of the investigated files. This means that the expected risk or return inherent in the portfolio will be different from what was agreed with the client.

Structure of the investigation

The investigation focused on banks and investment firms that offer asset management or investment advice to wealthy investors. The AFM has assessed client inventory, investment portfolio appropriateness, and investment policy. Investigations were performed at thirteen banks and investment firms. These firms are estimated to represent more than half of the market for asset management and investment advice in the Netherlands, expressed in terms of managed assets. The investigation consisted of meetings with the senior managements of these firms, assessing the answers of the firms to questions including substantiation with policy documents, and the assessment of advice and management files of individual clients. The AFM investigated 142 files for its investigation.

The investigation focused on services provided to wealthy clients. Naturally, the services provided to all clients are subject to the same statutory requirements, but full customisation is not always feasible. In 2013, the AFM published the vision document 'Custom services’, in order to improve the quality of the services for all target groups and, where necessary, to take account of cost-efficient services. This document lists several principles that can be used to align services with the clients’ need, situation and wallet. These principles might provide support when optimising services to clients that are not wealthy.

Improvements are being implemented

Banks and investment firms are aware of the points for attention that the AFM has identified in the field of the provision of investment services. They have promised to improve the quality of their investment services. Several parties have already implemented improvement measures. Using long questionnaires or detailed protocols is not always necessarily the solution. The AFM is positive about the commitment to implement improvement measures and expects that the sector will implement these measures with the appropriate degree of urgency.

Added value is very important

Since 1 January 2014, investors have been paying directly for investment services, which means that the provision of investment services is becoming more independent and more transparent. In addition, the AFM advocates a Comparative Cost Standard (formerly TCO). This standard is expected to provide investors with better insight into the total cost of services, thus enabling investors to better compare services and the related costs in advance. These developments mean that investment firms and bank can and must show their added value. They can provide even more added value to their clients by improving the quality of their investment services.

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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