Financial Consulting: Who Should Pay Whom

A significant number of Italian banks are wondering about the new setup they should give to their financial consulting services. These have been redesigned by the MIFID regulations, which, albeit not recent, now require more than formal compliance. In this context, one interesting item is the new regulation introduced by Britain's Financial Services Authority (FSA), which oversees banking and financial markets, and sets out new rules for inducements - the incentives paid to the intermediary by an agent different from the client - by forbidding banks to pay financial consultants fees, payments, and any other form of monetary incentive, starting with 2013.
The rationale behind the new regulation is clear and courageous at the same time: it clearly warrants that the consultant performs a service that is in the full interest of the client, by saying that his/her compensation for the financial product sold should only depend on the client and not from other parties, including the financial firm that put out the product; it bravely calls into question the existing business model of Italian banks, by which so-called retrocession fees accruing from financial products companies have constituted a major source of revenue in this business area.
Although the UK regulation has no effect in Italy, it will inevitably invite discussion about the propriety of adopting a similar rule in Italian asset management. The way the British regulations point to is to abolish the distinction between institutional and retail classes of assets. By placing only institutional assets with customers, retrocession fees will no longer be forthcoming in financing banking retail networks.The immediate and disruptive effect of such choice would be, on the retail side, to force banks to ask from clients an explicit compensation for the service of financial consulting being offered, which must necessarily be aligned with the effective and perceived quality of the service provided, and, on the production side, to deprive them of a commercial weapon in promoting their own financial products, thereby making apparent the ability (or lack thereof) of creating value with respect to the benchmark of active funds.

An important corollary of such a choice would be to push banks into making decisions about active and passive asset management, which on the retail side should not be dictated by the aim of making more fees, but rather by the aim of achieving higher returns with respect to markets of reference. The sensation is that a regulation similar to that launched by the FSA would give an important contribution in attaining higher transparency in a market segment such as mutual funds, which already enjoy comparatively high standards with respect to other types of financial products. But the true objective to be pursued is that of cutting the umbilical cord linking production and retailing through retrocessions, which all too often determines product-driven rather than customer-driven commercial behavior in banks.