Neither the investment consultancy or fiduciary management industries show signs of excessive concentration, the Competition and Markets Authority has found, but the vertical integration of the ‘big three’ firms could distort the market in future.
The competition watchdog was also unable to identify any barriers to entry or expansion that might limit competition in the sectors, in what under-pressure market leaders will point to as evidence of a properly functioning market.
The CMA’s investigation, prompted by the Financial Conduct Authority’s findings on the asset management sector, has recently led to calls for large consultancies to be separated from their fiduciary businesses.
In the investment consultancy market, the CMA found that no one firm had a market share of more than 20 per cent, and the three largest companies controlled less than half the market.
It may even be the right solution, it just feels uncomfortable that you haven’t gone through a proper process
Clive Gilchrist, Bestrustees
“The market is characterised by a number of well established, mid-sized firms who in several segments enjoy a stronger position than some of the three leading firms,” one of the three working papers found. Ten firms make up about 75 per cent of the market.
The fiduciary management market is more concentrated than consultancy, but not excessively so. The CMA noted that there are already five large players in the market, and that “there has been recent entry into the FM market by a number of large asset management firms”.
It found that while net profit margins in both sectors were above average at between 20 and 30 per cent, they were lower than those identified in the FCA’s analysis of asset management.
The findings were seized upon by Mercer, one of the 'big three' along with Willis Towers Watson and Aon.
“The working papers published today describe a market which is competitive and where profitability is not out of line with other comparable sectors,” it claimed in a statement.
“We believe that the investment consultancy and fiduciary management markets are working well for clients, a clear majority of whom have confirmed to the CMA their satisfaction with the services they have received.”
Concerns over consultant relationships
But for all the relief the working papers have met with from large consultancies, they do include a warning about the potential for future high levels of concentration in the market.
Total revenues in fiduciary management have trebled over the past five years, and the combined position of Aon, Mercer and Willis Towers Watson has increased by around 40 percentage points in the past 10 years.
“We consider that these firms could continue to collectively gain market share in the foreseeable future and there is a possibility that concentration may increase in the FM market in the next few years,” the CMA stated.
It also reiterated the conclusion of a previous working paper, that large consultancies’ existing relationships with clients might be helping them to gain market share in fiduciary management.
An 'uncomfortable' decision
It is this relationship that has been a bone of contention for competitors in the sector, and the CMA appears to be validating this argument.
“The bit that [the CMA is] more worried about is the ability of investment consultants to just translate their own clients into fiduciary clients,” said Bob Campion, senior portfolio manager at Charles Stanley Asset Management’s fiduciary offering.
That is not to suggest that consultants are recommending poor choices of fiduciary manager to their clients, said Clive Gilchrist, deputy chair at professional trustee company Bestrustees.
“It may even be the right solution, it just feels uncomfortable that you haven’t gone through a proper process,” he said.
Solutions are tricky to identify
The problem, then, is how to clean up the tendering process for fiduciary management services. Unsurprisingly, middle-tier consultancies like Xafinity Punter Southall have called for the separation of the ‘big three’ from their fiduciary arms, but Campion doubted the chances of this outcome.
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Neither are third party oversight functions an obvious answer for all schemes, said Gilchrist.
“If the mandate’s big enough then that’s justifiable, but otherwise you’re just loading on additional costs,” he said.
That could point to a more pivotal role for professional trustees. The only problem with that, said Rosalind Connor, partner at Arc Pensions Law, is that if the trustee is not an investment specialist, they might still require outside help.
However, this help often proves to be worth its cost. Connor said the primary benefit of third-party advice is to cut through jargon and steer trustees to ask the right questions, but that boards must not delegate their responsibility for the decision.*
“If you have a trustee who is empowered that’s much better than a trustee who’s relying on someone else to tell them what to think,” she said.
*This article has been amended to correct inaccurate reporting of a statement by Rosalind Connor.
