The Law of Unintended Consequences

The Law of Unintended Consequences

Photo by Markus Spiske on Unsplash

It’s hard to know how (or what) to write about the situation investors currently find themselves in when so many people much more eloquent than me are doing such a great job. We’ve been keeping in regular contact with our clients, but I’ve felt that sharing excellent posts from others probably serves my blog audience better than me trying to find a way to reinvent the wheel.

That said, there is one issue which I have seen no coverage on at all. This may be because it only affects investors in Europe (and most of the social media commentary is coming out of the US), and only those who use a discretionary manager, such as us, but it amazes me that there has been nothing in the media about this issue.

The issue in question is the MiFID II 10% drop notification.

In the Financial Conduct Authority’s (FCA’s) handbook, this rule is defined as follows (emphasis mine):

“Investment firms providing the service of portfolio management shall inform the client where the overall value of the portfolio, as evaluated at the beginning of each reporting period, depreciates by 10% and thereafter at multiples of 10%, no later than the end of the business day in which the threshold is exceeded or, in a case where the threshold is exceeded on a non-business day, the close of the next business day.”

It’s worth bearing in mind the following points which impact on these notifications:

  1. Prior to the implementation of MiFID II, clients could elect to receive portfolio valuations half-yearly. Now the minimum period is quarterly, so these notifications will be triggered if a 10% fall occurs since the end of the previous quarter, a much shorter time period;
  2. The 10% drop notification IGNORES the fact that clients may hold assets in a number of different wrappers, i.e. a taxable account, an ISA, a SIPP, an offshore bond. Each account is treated individually.


When the rule came into effect in January 2018 it was noted that if it had existed from January 2008, clients would on average have been written to 31 times.

Given that the message all financial planners and portfolio managers try to impart above everything else is that equity-based investments are long term investments how must it feel to be bombarded with communications drawing your attention to the fact that one (or all) of your accounts has fallen by 10% or more?

We’ve certainly had several instances since the rule came into force when notifications had to be sent to clients – the sharp dip in December 2018 was the last one – but we’ve never experienced anything like this.

Since markets went into freefall a few weeks ago we have been receiving a list each day advising us which clients will be receiving notifications that day. At first, it was just clients who had a relatively high exposure to equity investments or had an account in which a high proportion of the equity exposure is held, for whatever reason. But by last week the list had grown to between 35 and 40 notifications per day. We only look after 67 client families, so some clients are receiving multiple notifications, and have been receiving them multiple times over the last few weeks.

Our process is to contact clients before the notifications go out, to a) give them a heads up and b) to try and combat any anxiety such notifications might engender.  Thankfully, so far, our clients have taken these notifications in their stride. I like to think this is because we make sure they are invested in line with their emotional tolerance to risk and of course they each have a financial plan which is their roadmap to refer to at times like this.

Furthermore, we introduced Investment Policy Statements for every client last year where we have agreed and documented, while things were rosy and decisions not clouded by emotion, exactly what action clients would take (e.g. suspending withdrawals from the portfolio) in the event of a market crash like the one we are currently going through.

But that hasn’t stopped clients expressing their frustration to us as to what a total waste of time the exercise is, and I can’t help but agree.

Firstly, as you probably know, Bloomsbury is a branch of Raymond James. They create the reports each day and must be spending countless hours generating and checking them before they are sent out to the relevant clients of their branches.  Apparently, some days they are dealing with thousands. And for every client who does not have an email address they have to produce letters and stuff envelopes – all at a time when half their staff are working from home due to COVID-19! Then we have to spend time contacting clients to let them know the notifications are coming and trying to pre-empt any questions or anxieties. And clients are being bombarded with information they neither want nor need.

Multiply that across all Raymond James’s branches (and most of these will have many more clients than we do) and the number of hours being spent on this must be horrendous. And to what end?

Who benefits from this rule? How does it help to engender ‘good behaviour’ by investors? How does it help clients to focus on the long term when they are being slapped in the face with what their portfolios are doing? Some of our clients have received these notifications over and over again. What purpose does it serve?

No notifications are required to report gains to clients. We have one client who, due to historical reasons and a large unrealised chargeable gain, holds a huge amount of an individual stock which has fallen in value by 51% in recent weeks. But when it increased in value by 15% in one day last week there was no notification sent to him of that.

I’ve tried to find out what the original thinking was behind this rule and what those who came up with it felt would be the benefits to investors and I cannot find anything (although I accept there might be something out there which is eluding me). If I could find just one reason why this is a good thing, I’d find it easier to accept, but I can’t.

My colleague Rob tells me it was to stop the industry from hiding information from their clients. I’m not sure how much of this was going on before MiFID II but I don’t think the vast majority of portfolio managers have been trying to hide information from clients – online access is now so widespread clients can look up the value of the accounts themselves on a daily basis if they are inclined to do so.

Ultimately, our job is about trying to make sure clients do the right thing at times when emotions can be running high. And this really isn’t helping.