NAFOP the National Association of Fee Only Planners

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1 the National Association of Fee Only Planners Observations and reflections to CESR s Consultation Paper Before addressing directly the issues highlighted in the Consultation Paper CESR, we would like to present some reflections on the professional figure that our Association represents: the independent financial adviser (may he be a legal person or a natural person) who provides only the service of investment advice without conflicts of interest and is paid solely on a fee basis which is paid by his client. Our members do not receive commissions or inducements from any broker or product company, as they carry out their professional activities for the exclusive benefit of their customers, from whom they are directly remunerated. Any person working in contact with investors has lived in recent times in a new context, marked primarily by a concern for the safety of savings set aside and the growing distrust of the financial system. In this context, the difference between the fee only independent consultant (who is paid only fees paid by the customer) and other activities with "consultancy" content, which are however directly or indirectly instrumental in the placement of products or other investment services, clearly emerges. The fee-only consultant is primarily a planner. This is not just putting emphasis on conflicts of interest, as it is known that the main factor of real return is risk, but it is to emphasize that there is an activity which is necessarily prior to investment, which consists of defining the investment aims, the measurement of risks, and the mindfully taking of those risks that are necessary to achieve such aims; this activity cannot be condensed into a form and is, for its nature, typically professional. It is a business that fits naturally to a self-employed professional because it requires that relationship of knowledge of the client and trust of the client that has its ideal setting in a personalized continuous relationship which is free from conflicts of interest, typical of professional activity. Any organization that has commercial purposes is pressed by the need for standardization, by the need to have a link between sales and product design and staff turnover, which poses serious difficulties for the activities we have briefly outlined. A professional has the time and means to encourage and recruit the process of realistic formation of goals together with a realistic perception of risk. He will therefore contribute to the implementation of a portfolio which has, among its determinants, the development of mutual understanding and awareness of the customer, as well as his actual ability to operate in financial markets.

2 In view of the complex needs of this process, profiling the client, set by MiFID is only a minimal protection scheme, a scheme that can and should be imposed on those who carry out activities involving implied conflicts who do not reside only in the commission of the products and services, but in the business and organizational needs of the system of financial distribution. Quite different is the position of the "professional" independent consultant who is paid only by fee. Imagine a world in which the prescriptions of the drugs may be made only by pharmaceutical companies or their distributors. Imagine having to sell a house and discover that the value of buildings is determined only by builders or real estate agents. Until now, even those who wished to seek advice on their investments, could seek advice only from persons with interests in conflict to their own. It is evident in the MiFID the concern to identify and regulate the conflicts of interest between operators and clients as for what regards investments, in the conviction that such conflicts are potentially harmful to the investor. The fee only financial advisor is characterized and defined by the absence of interests in conflict with those of the investor. Today, next to the advice offered by persons "in conflict" may be placed advice without conflicts of interest, to the benefit of savers and of financial market transparency. Advice which is provided as part of an activity that is purely professional and is therefore paid only by fee. The real question is the very independence. It is the real novelty, that can do good to both savers and to financial markets. All professions, moreover, have a scheme to remove conflicts of interest, proving that they are in conflict with the advice itself and are detrimental to the public, even beyond the will of individuals. In Italy, for example, the practice as a chartered accountant is incompatible, inter alia, with the exercise of trade in one s own name or on behalf of others, with intermediary businesses, with stock brokerage, etc.. Registration for this practice is generally prohibited to public employees. The same can be said of the legal profession, which is incompatible, inter alia, with the exercise of the profession of notary, with the exercise of trade in one s own name or on behalf of others, with the quality of bank manager, broker, with any employment or office with a salary paid from state budgets, from provincial or municipal budgets, from Senate or House budgets, etc.. As for Architects in Italy, the standards of professional ethics dictate, when they exercise the profession, that they may not be directly or indirectly involved with the construction companies that provide or direct the work designed for the contractor, nor receive any compensation from third parties, whatever the cause. The same applies if they are also involved in promotional activities of real estate transactions.

3 Q.1. Do you have any comments on the distinction between the provision of personal recommendations and general information? Executive Summary The main areas focus on topics including: The provision of personal recommendations and whether other forms of presenting information such as investment research, filtering, general recommendations, generic advice, presenting multiple products or access to model investment portfolios could constitute investment advice. when recommendations will be viewed as based on a view of a person s circumstances. Perimeter issues around the definition of personal recommendation, including disclaimers to the client and failing to use known customer information. whether the internet is always a distribution channel, messages to multiple clients, distinguishing corporate finance and investment advice. The possibility that one may bypass the rules immediately come to the eye, operating on the borders of the definition of investment advice. The possible misunderstandings listed are much more likely and more dangerous in relation to the operators who manage a large number of relationships, and may standardize them. However the risks appear to be reduced within a personalized relationship. II. Introduction 1. The Markets in Financial Instruments Directive (2004/39/EC), or MiFID, identifies investment advice as an investment service, the provision of which, on a professional basis, generally requires authorisation as an investment firm. Note 1 Some exemptions are provided in MiFID, including exemptions for the incidental provision of the service (Article 2(1)(c)) and the provision of the service in such a way that it is not specifically remunerated (Article 2(1)(j)). Exemptions from the reserves prescribed by the Guidelines appear dangerous, given the principle of adequacy ratio, and are based on dubious grounds. We must work for their removal or for their more stringent definition. Examining the definition of investment advice 3. For the purposes of the definition of investment advice, that recommendation must be presented as suitable for that person or must be based on a consideration of the circumstances of that person (Article 52(1) of the MiFID Implementing Directive). The purpose of the definition of investment advice given by MiFID takes the need for adequacy as warranted, that is that the consideration of the circumstances of the Customer (we could also say of his financial situation) is the basis of the advice itself and the policy orientation of its contents.

4 This point is of extreme importance because it constitutes the fundamental principle of the system of investor protection from anyone who creates, places, deals or sells financial instruments and products. The MIFID guidelines identify many opportunities that financial operators pursue their own interests while harming investors and they provide advice, bound by the principle of adequacy, as the element of investor protection itself. Now it is clear that detecting the circumstances of the investor - or characteristics, financial conditions - is a complex and demanding activity. It involves the recruitment of much high quality information: information on family and relationships and responsibility of the person, his financial and general culture; his psychology in relation to risks and returns, its heritage; about his insurance status and social security; his income, his economic life style, etc.. All complex and changing circumstances. This means carrying out a real activity of discovery and connection to recommendations, activities which have for themselves a confidential and continuous nature. Activity which is therefore its most appropriate placement in an interpersonal relationship elective. Pursuant to the achievement of the objectives of the directive it is necessary to ensure that investment firms that provide advice on investments - be they consultants who do not hold investors' money and not engaged in employment or agency, or be they authorized brokers - put at the Customer s disposal staff who is prepared to perceive the problems of global personal financial planning, which can devote to each client an adequate amount of hours each year; that the client not be subject to frequent rotations of attorney so as to prevent the personal knowledge of the customer. Failing this, the principle of adequacy is likely to be significantly devalued, reduced to a schematic and formal classification, becoming rigid over time. Considering an investor s view of whether advice is being given (Test 3) 5. Where the client reasonably believes that a personal recommendation is being provided, because it is reasonable to think either that the recommendation is being presented as suitable or that it is based on a consideration of his circumstances, it should be considered that investment advice is being provided, subject to the fulfilment of the four other tests. The point is important for investor protection. As part of an ongoing interpersonal relationship is easier to detect what is the perception that the investor has of the advisors communications and avoid misunderstandings about what which are and which are not investment recommendations. Assumptions made in preparing this paper 7. References to clients or investors made throughout the rest of this paper can also be read as applying to potential clients or potential investors. The technical annotation of the text brings one to reflect on the responsibilities inherent in promotional communications of the firm engaged in the placement or intermediation along with counseling. These companies are exposed to a high risk that the activities of promotion or solicitation may be taken as, by the potential customer, an activity of investment advice.

5 In fact, for what concerns potential customers there still hasn t been a contractual provision that defines, in a personalized manner, the formalities of consulting. What is the difference between providing information and providing a recommendation? When does the provision of information to a client constitute a personal recommendation? 15. The mere provision of information to a client by an investment firm does not normally constitute investment advice. However, information may take on the nature of advice if the circumstances in which it is provided give it the force of a recommendation. 16. e.g. by placing special emphasis on the advantages of one product There appears to be a risk of misunderstanding in the cases in which the consultant does not establish a specific formal communication of the recommendations. There also appears to be a very high risk in cases where the person carries, as well as consultancy, placement and brokerage activities. In the latter case, moreover, a generic "disclaimer" does not seem sufficient to distinguish consultancy activity from brokerage and placement activity. Q.1. Do you have any comments on the distinction between the provision of personal recommendations and general information? More generally we can say that the distinction between communications, information and comparisons on the one hand and recommendations actual hand, seems much easier when the activity of the subject is limited to purely advisory, with the circumstances of personalized communication and more time devoted to the Customer. The distinction by the Customer is also favored by the complete absence of the placement. Conversely, the presence of jobmatching and brokerage necessarily lead to emphasize the benefits of certain instruments or products in the same context in which they are providing their recommendations and makes it difficult to separate the two activities. The only convincing solution would be to require financial intermediaries to obviously separate the staff dedicated to advice from the staff dedicated to placement and intermediation, prohibiting to first group the second function to the latter the first function. All the points of view on the benefits of the products or tools involved in promotional communications, printed materials, advertising, web, should also be accompanied by the words alone do not constitute advice on investments. Q.2 Do you agree that the limitation that filtered information is «likely to be perceived by the investor as, assisting the person to make his own choice of product which has particular features which the person regards as important.» is a critical criterion for determining whether filtering questions constitutes investment advice? Can investment research amount to investment advice? 20. For example, if the sales force of a firm s investment research to a number of clients and subsequently engages in telephone calls discussing the merits of the particular financial instrument that the research identifies, presenting it as suitable for the client, the firms actions may amount to the provision of investment advice. The reference to "sales force" shows that the possibility of misunderstandings or bypassing of

6 legislation is particularly linked to the activities of placement or brokerage and advisory activities by the same people. Can a firm guide a client through a set of filtering questions about the investment products it offers without this constituting a recommendation? 23. A critical factor would be whether the process is limited to, and likely to be perceived by the investor as, assisting the person to make his own choice of product which has particular features which the person regards as important. Q.2 Do you agree that the limitation that filtered information is «likely to be perceived by the investor as, assisting the person to make his own choice of product which has particular features which the person regards as important.» is a critical criterion for determining whether filtering questions constitutes investment advice? The proposed criterion is correct, but must be supported by further specifications and a stringent regulatory authority. You must first avoid that the filtering system is presented as an instrument sufficient in itself or in competition with other instruments and analysis produced by the subject, to build a portfolio or to make appropriate choices of investment. It should also ensure that even in the absence of these features, the filtering tool be presented as dangerous for investors because the logic of construction appears to substitute the advice itself, as if part of the structural model of a consultative process. Q.3. Do you believe the distinction between general recommendations/generic advice and investment advice is sufficiently clear? Do you have examples of types of advice where the designation is unclear? If a firm gives investors access to model investment portfolios, which are composed of different financial instruments that it can sell them, is this investment advice? 26. If we consider a situation where a firm provides, on its website or through another medium, the possibility for investors to determine their investment profile (e.g. dynamic, conservative etc.) and for each profile discloses a related model portfolio, composed of different financial instruments, situations can certainly be envisaged in which providing such a service is likely to amount to investment advice. If buying, or subscribing for, the financial instruments identified in the model portfolio is positioned as the appropriate action for the investor to take, the overall service might be viewed as a recommendation rather than merely the provision of information. The issue of model portfolios is particularly delicate. The principles set out in the consultation document are formally correct but appear insufficient to prevent investment firms from circumventing the substance of the principle of adequacy, or even unintentionally mislead investors. In order not to violate the spirit of the MiFID, it is necessary to require the publication of each model portfolio should always be accompanied by a warning that the allocation is not appropriate advice and that advice on investments requires a specific custom activity by the investment firm. IV. Part 2: Is the recommendation in relation to one or more transactions in financial instruments? What does it mean to make recommendations in relation to transactions in financial instruments? 30. According to MIFID, the definition of recommendations does not necessarily involve the adviser reviewing a wide range of financial instruments. Advice can also be based, for example, on a review of just a firm s own products or a restricted list of financial instruments.2

7 Even an activity regarding a small placement is subject to all legislative requirements. However, we should determine how may it be possible, for those who propose exclusively specialist products, which by nature are intended to integrate a small part of the investment portfolio, to know your customer and collect the same sufficient information not only about his personal and financial situation but also on remaining investments, information that may establish an appropriate counseling. Q.3. Do you believe the distinction between general recommendations/generic advice and investment advice is sufficiently clear? Do you have examples of types of advice where the designation is unclear? An example is a general recommendation provided to a customer base previously selected on the basis of personal characteristics. In such a case the principle of adequacy can be avoided or there may be a misunderstanding on the part of recipients on the content, investment advice or not, of the general recommendation. Q.4. Is there sufficient clarity as to when an implicit recommendation could be considered as investment advice? If not, what further clarification do you think is necessary? Is a recommendation to become a client of a particular investment firm investment advice? 42. Recital 60 of the MiFID Implementing Directive notes that advice given by a portfolio manager to a client to the effect that the client should give or alter a mandate to the portfolio manager that defines the limits of the portfolio manager s discretion should be considered a recommendation within the meaning of Article 19(4) of MiFID. This Recital makes clear that advice in relation to a portfolio management mandate is subject to the requirements on assessing suitability (although it is not necessarily a personal recommendation). It is very important that the mandates of management and their changes be subject to a very strict regulation in the assessment of adequacy. In fact, these mandates eliminate the natural direct control of the investor on investment choices. Compared to consultancy carried out in the absence of management mandate, they deprive the investment firm the task of motivating the client on the individual choices, a burden which is a natural check on the quality of the decisions themselves. It is also good for there to be an obligation for the recipient of the management mandate to verify at regular intervals the whole process of adequacy, in order to avoid that the passive position of the customer inherent to the mandate of the portfolio management, which may reduce to a minimum contacts the firm and the client, conceals important changes to the investment profile of the customer. V. Part 3a: Is the recommendation presented as suitable? Can an implicit recommendation be considered as investment advice? 43. Yes. A financial instrument might be presented as suitable for the investor in an explicit or implicit form.

8 The problems of the implicit recommendations is present overall in case of carrying out contemporarily the business of placement and brokerage activities together with advice activity. The personalized relationship and the carrying out of the sole advice activity seriously limit the possibility of abuse or misunderstanding regarding the adequacy of the recommendations offered. Q.4. Is there sufficient clarity as to when an implicit recommendation could be considered as investment advice? If not, what further clarification do you think is necessary? About the persons who are not active in brokering and placement together with consultancy, it should be established that a general exclusion be valid, by agreement, of implicit recommendations, namely the expectation that the recommendations are considered such only if explicit. For there is no reason to fear that this clause could be of general damage to investors, lacking any interest of the consultant misunderstanding, indeed it can return to their advantage. In other cases, however, where there is interest in placement and intermediation, the general principle expressed by the document on the possibility that a implicit recommendation count as explicit is a necessary protection of the investor. Q.5. Are the circumstances where it is clear the firm is making a personal recommendation sufficiently clear? Would further clarification be helpful? Can a firm avoid providing investment advice using a disclaimer in its communications? 47. Even if a clear, prominent and understandable disclaimer is provided stating that no advice or recommendation is being given, a firm could still be viewed as having presented a recommendation as suitable for the client. If the disclaimer does not change the nature of a communication, meaning that the communication would still create a reasonable expectation by the client that he is being advised, the firm may be viewed as providing investment advice. On this point, we confirm and repeat the considerations made above. VI. Part 3b: Is the recommendation based on a consideration of the person s circumstances? When will a firm be viewed as basing a recommendation on a consideration of a person s circumstances? 50. For example, if a firm has information about a client s circumstances, including information on areas like his investment objectives or financial situation, it might reasonably be expected that this information is being used to create a picture of his needs and wants to form the basis of a recommendation. Can a firm avoid being viewed as making a personal recommendation by failing to use information about a person s circumstances? 51. No, not if a firm has accumulated information on a person s circumstances either during a single interview or during the course of an ongoing relationship and it might reasonably be expected that this information is being taken into account Can a firm avoid making a personal recommendation by telling the client that its recommendation is not based on any information collected from him? 53. No, not if the firm has information on the person s circumstances and in all other ways created a reasonable expectation that this information will be taken into account

9 In cases where no other activity is carried out besides advice, the chances of misunderstanding can be resolved through the clarity of communication. In other cases, the interest in placement and intermediation produces the exposure of characteristics and advantages of products and tools that can objectively give rise to a behavior that meets the criterion of the advice given in the knowledge of the circumstances of the customer. Many brokers protect themselves by blocking of operations of the customer, located at the limits of risk deemed to correspond to the profile of the customer. This technique raises some problems. The first, generally, is that the risk characteristics of a choice of investment are not the only characteristics that are taken to make a personal choice. The second problem is that the blocking of transactions to be considered as not conforming to the profile will not necessarily protect the investor, which could make the same transactions through other brokers. In practice, then not infrequently happens that the stresses of the sales force to motivate some investment changes the risk profile registered, and not viceversa changed circumstances reviews are a source of research for various investments. The trust on broker, based also on information about the its customer, objectively puts overshadowed the formal activity profiling reviews. Only the separation of brokerage and placement than advisory, through personal and different times, can provide an effective solution to the problem. Q.5. Are the circumstances where it is clear the firm is making a personal recommendation sufficiently clear? Would further clarification be helpful? This issue is particularly complex, investing all the quality of communication with the customer, the personnel to deal with the customer and the relationships between business and consulting activities. Particularly dangerous for the adequacy of advice appear the production budget that intermediaries and placers used for economic optimization of the activity of its staff and contact with investors. Added complexity raises the possibility that investors with various intermediaries, even if everyone does not give partial information. Q.6. Are there other criteria you believe should be considered when determining whether messages to multiple clients constitute investment advice? VII. Part 4: Is the recommendation issued otherwise than exclusively through distribution channels or to the public? Can a message sent to several clients, for example through s or letters, be considered as investment advice? 64. In order to assess whether a message sent to several clients amounts to investment advice, different elements should be taken into account: the target audience, the content of the message and the language used: Target audience: the way the firm selects the clients to whom the message will be sent can have an incidence on the qualification of that message as investment advice. If the recipients of the communication - or seem - selected on the basis of characteristics such

10 as census or capacity of risk, such as to integrate personal, communication could often be regarded as advice on investments. The brokerage and placement leads to propose topics of investment to a targeted customer audiences through the ideas expressed in public communication. The concept expressed - for example, "capital protection", "protection of savings", "investment through advanced techniques", "newsletter for investors sensitive and dynamic" - draws the attention of a certain audience, which is self-selection. This may include the features of a personal consultation. Even more if it is the intermediary itself to limit the target of his communication to specific individuals crossing a market analysis and the information held on them. This activity is easily perceived by stakeholders as custom and, indeed, often presented as such to give it value. It easily ends of concrete advice on investments. Q.6. Are there other criteria you believe should be considered when determining whether messages to multiple clients constitute investment advice? The definition of criteria which include every possible case is particularly difficult, especially for brokering and placement which themselves apply to a select audience. Q.7. What information would be helpful to assist in determining whether or not what firms provide constitutes investment advice or corporate finance advice? VIII. Part 5a: Is the recommendation made to a person in his capacity as an investor or potential investor? What does it mean to make a recommendation to a person in his capacity as an investor? 68. Under MIFID, it is not relevant for the purposes of advice definition whether a client is specifically paying for the advice or if advice is provided as part of a wider package of investment services (for which the investment firm might even be remunerated via a third party). In the Mifid world, investment advisory are not relevant by advisor, whether he was in conflict of interest or not, because it was remunerated uniquely by a fee. The one advisory is only identified by the contents of advisory. This issue make several problems. First of all, investor may be affected by other financial activities such as placement, intermediation, information which complete every action of advisory. The investor protection, in all these cases, imply a tightening of regulation. So, the same regulation seem in the major part exaggerate for all people who provide only investment advisors and not any supplementary service that can make money. For these people it seem more much important that investor protection focus on independency garancy. In practice, how should corporate finance advice be distinguished from investment advice? 74. On the one hand one may prefer to think that the scope of investment advice, since it is a core investment service subject to authorization and to which important standards are attached in the interest of investor protection, should, in the event of doubt, prevail. Proponents of such an approach may refer to the conflict of interest that often occurs in such transactions in order to justify a suitability requirement and, more broadly, the application of the relevant protections afforded by MiFID.

11 It s opportune to recall another time all attention on fundamental motivation for what investment advisor has been established as investment service subject to reserve: investor protection against conflict of interest. This issue is well highlighted in the reference document. The one issue require a special discipline and different for people that provide investment advisory without any conflict of interest. Q.7. What information would be helpful to assist in determining whether or not what firms provide constitutes investment advice or corporate finance advice? Informations more important are about the ability of investor or customer to know and contemplate any conflict of interest of advisory and of all parts involved in all operation of advisory. This issue is deduced by the aim of protection on investment advisory definition and on suitability notion. Thank you for your attention. the National Association of Fee Only Planners