MiFID II - a risk averse option

The speculation regarding MiFID II and its impending arrival in January 2018 is leading to a flurry of articles, covering every facet of it. But why? Is it scare tactics? 

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To some extent perhaps it is the above, but in an industry whereby much of the decision-making is based on forecasting for things that have not yet happened, this could be just another thing to add to the list of uncertainties.

Investment portfolio managers use portfolio theory to diversify specific risk, just leaving market risk. Analysts use models to forecast potential future earnings, whilst companies make their own forecasts, having to monitor those of analysts. Difficulties arise as discussing any differences is a risk in terms of insider trading. Everything is a risk, even the ‘steady’ stock in your portfolio is susceptible to market risk. MiFID II just adds to an industry already synonymous with uncertainty.

So what do we know?

We know that fund managers will have to pay for all of their material conducted by investment banks. We know that analyst coverage has diminished over the last decade since the first directive came into effect. We know that the FCA has clarified that small companies may receive a respite on this rule.

What do we need to be wary of?

Smoke and mirrors. Is this fuss about nothing? The industry is not so sure. Various risks include finding new investors becoming harder; the question ‘could you be overlooked?’ in our last article was asked. These are all still valid arguments, but perhaps the most logical question is how do we de-risk the impact of MiFID II (to as great an extent as is possible)?

For a long period of time, analysts have provided the external validation of a company’s prospects, their forecasts help investors make the decision whether or not they invest. For companies now, the least risk surely comes from practising their own effective IR strategy, communicating a clear, concise set of messages to the market across every touchpoint that business has with the market. Certain attributes such as your company’s long-term prospects, plan for future growth, as well as your source of competitive advantage that you will leverage moving forward, are all attributes that make your company different from peers within your industry.

At Jones and Palmer, our belief is that telling an effective story can be the most risk averse method in which to prepare for this change. The reason for this is that, practising good communications across all touchpoints is likely to provide the market with much of the information it relies upon from analysts, and in so doing, analysts may be more inclined to take the time to research you.

In terms of risk, improving your communications strategy will be of benefit to your business regardless of whether MiFID II causes large shifts, or just ends in smoke and mirrors.

To find out more about how we can help, get in touch.