Regulators are never happy with the quality of financial advice that consumers receive. They constantly seek to tweak and tinker with the rules. The latest EU Directive introduces a Key Information Document (KID) for all investment products. The aims are admirable – the execution is miserable.
The objective is to inform potential retail investors in a short, coherent format (maximum 3 pages) of the important features of the product so that they can readily compare it with KIDs for other products. However, MMPI has a real issue with the confusion that has already been caused by this convoluted document.
Consumers will be familiar with the vehicle specifications that appear at the back of glossy brochures for new cars. Maybe some techies understand the figures but mere mortals haven’t a clue. Now imagine the specifications are torn from the back of the brochure. You’re left with a few pages of tables and charts and loads of perplexing permutations.
This car has a cylinder arrangement of i-line X8; and a rated output of 190/258; and displacement of 2995. Admit it! Does an ordinary driver understand any of this? The interesting thing about splitting the specifications from the vehicle brochure is that the make and brand of car are not mentioned. A consumer would be hard pressed to determine whether the means of transportation was a car; a lorry or a bus. There are manufacturer reference numbers alright but what do they mean?
So too with the Key Information Document – it is intended as a standalone data guide with no direct reference to the product brochure. The KID contains the ISIN number, which identifies the product listing on regulated markets – and it contains the manufacturer’s reference number, which is equally meaningless to consumers. All KIDS are standardised so it is possible to compare them with each other – but if the rated torque is 520/3000 compared to 510/3500 which car suits you best?
The KID contains performance scenarios of moderate; favourable and unfavourable but makes no effort to explain what these terms mean or how they might relate to each other. How should consumers interpret the following extract from a KID? – favourable performance 1.21% pa; moderate 0.61% pa and unfavourable 0.61% pa.
There is a section called Summary Risk Indicators, which tries to indicate how risky the proposed investment is on a 1-7 risk scale. The product manufacturer must assess the risk in accordance with detailed regulatory guidelines. The formulae for measuring the risk indicator used in the KID are based around the historic volatility of weekly returns (past performance). This calculation is then projected into the future. But there is no warning contained in the KID that past performance is a poor and inadequate guide to future outcomes.
MMPI is convinced that in the absence of personal, face-to-face financial advice many consumers will find the KID confusing and misleading. The law of unintended consequences where regulators believe they’re protecting consumers but they’re actually not! This is the financial equivalent of the EU’s quest for straight bananas – a demented struggle with the natural order.
The MMPI Escalator Plan Series 24B, which did not have a KID but did have an easy-to-understand product summary penned by MMPI, matured last week after 30 months paying 28.55% – pleased and enlightened investors abound.