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July 13, 2022

Wealth managers must conduct an urgent gap analysis for MiFID II suitability requirements

There are three key challenges for European banks and wealth managers when it comes to ESG investing. The first is credibility: According to an Avaloq survey, 61% of affluent to ultra-high net worth investors in Europe question whether sustainable investment options are truly sustainable. The second major challenge is data. Since there is currently no standardised ESG rating system, the same company can receive different ratings depending on the agency, which makes it extremely difficult to draw meaningful comparisons between the sustainability performance of different companies and investment products. Martin Greweldinger writes

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Analyze opportunies within the wealth management market in APAC

GlobalData’s ‘Asia-Pacific Wealth Management: Market Sizing and Opportunities to 2026’ report provides a comprehensive overview of the Asia-Pacific (APAC) wealth management market.
  • The report analyzes the APAC wealth and retail savings and investments markets. This includes affluent market size, both by number of individuals and the value of their liquid assets.
  • The affluent population grew by 5.3% in 2021 and is expected to grow at an AAGR of 4.8% between 2022 and 2026.
  • The value of liquid assets held by the affluent segment surged by 8.4% in 2021, backed by economic recovery. HNW individuals’ financial wealth grew by 12%, while mass affluent individuals’ wealth grew by 6.0%.
  • The report provides an analysis of factors driving liquid asset growth. It is also split into asset classes - equities, mutual funds, deposits, and bonds.
  • The affluent population are more risk-tolerant and invest a significant proportion of their investments in risky assets such as equities, compared to emerging affluent and mass market individuals.
The report also provides data and insights on the size of offshore holding of HNW investors in the APAC region.
by GlobalData
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The final key challenge is time and whether a firm’s investment platform can guarantee compliance with new MiFID II rules by the impending 2 August deadline. From this August, wealth managers with EU-based clients will be required to expand their investor suitability assessments to include ESG preferences. Under the latest amendment to MiFID II, wealth managers will need to proactively assess their clients’ sustainability preferences in the same way that risk tolerance and investment knowledge are measured currently.

ESG can no longer be an afterthought

Sustainability based on ESG criteria is a rapidly growing investment theme, driven in part by regulatory forces. And while many wealth managers already offer their clients access to sustainable funds and products, the onus is often on investors to specifically request them.

Sustainability preferences will now have to comprise a routine part of the investor profile. The upcoming amendment to MiFID II not only requires a cultural shift within the industry, but wealth managers will also need to apply an ESG classification system – based on regulation as well as industry standards such as EET (European ESG Template) – to create a list of environmentally sustainable products and define how these products align with investor preferences.

A matter of compliance and reputation

Recent changes to MiFID II mean that ESG offerings are no longer just about gaining a competitive edge or fulfilling sustainability goals. It is now also a matter of compliance and reputation. Financial institutions need an investment platform that can seamlessly capture investors’ ESG preferences and integrate them into suitability assessments. Technology can help by providing automated access to ESG ratings to help match investors’ sustainability objectives with ESG data points.

Furthermore, recent headlines around greenwashing will make investors even more discerning when it comes to choosing a sustainable investment solution that meets their personal goals and expectations.

Prioritise a gap analysis

As we approach the August deadline, wealth managers should conduct a gap analysis to check that their investment platform can guarantee compliance with changing regulations for EU-based clients, with data-backed ESG investment products that cover both discretionary and advisory mandates. This will allow them to identify any shortcomings in the investment journey and, where necessary, evaluate the need for a specific ESG solution for their business.

A wealth manager’s ESG solution should incorporate investors’ preferences based on the Principle of Adverse Impacts (PAI), define minimum allocations of sustainable investments in line with the defined taxonomy objectives, and classify sustainable investments in accordance with the Sustainable Finance Disclosure Regulation (SFDR). These sustainability preferences should be applied across the entire investment advisory and portfolio management process. The ESG solution should be able to model suitability rules and automatically collate sustainability data from trusted sources such as MSCI.

The easiest way for financial institutions to meet these new requirements is to add an ESG layer on top of their existing framework for determining investor suitability – with an expanded investor questionnaire, the addition of standard ESG ratings and new exclusion criteria.

ESG leadership

The changing regulatory landscape will give ESG investing a much-needed overhaul and align it more closely with the expectations of investors – especially younger cohorts, who are the wealthy clients of tomorrow. But it is also an opportunity for financial institutions to position themselves as ESG leaders instead of simply playing compliance catch-up. Taking a proactive approach and implementing a robust technological solution to rapidly respond to this new regulation can boost a financial firm’s reputation and sustainability credentials, which will be vital for client acquisition and retention in the future.

Martin Greweldinger is the co-CEO of Avaloq

Free Report
img

Analyze opportunies within the wealth management market in APAC

GlobalData’s ‘Asia-Pacific Wealth Management: Market Sizing and Opportunities to 2026’ report provides a comprehensive overview of the Asia-Pacific (APAC) wealth management market.
  • The report analyzes the APAC wealth and retail savings and investments markets. This includes affluent market size, both by number of individuals and the value of their liquid assets.
  • The affluent population grew by 5.3% in 2021 and is expected to grow at an AAGR of 4.8% between 2022 and 2026.
  • The value of liquid assets held by the affluent segment surged by 8.4% in 2021, backed by economic recovery. HNW individuals’ financial wealth grew by 12%, while mass affluent individuals’ wealth grew by 6.0%.
  • The report provides an analysis of factors driving liquid asset growth. It is also split into asset classes - equities, mutual funds, deposits, and bonds.
  • The affluent population are more risk-tolerant and invest a significant proportion of their investments in risky assets such as equities, compared to emerging affluent and mass market individuals.
The report also provides data and insights on the size of offshore holding of HNW investors in the APAC region.
by GlobalData
Enter your details here to receive your free Report.

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