Investment consultants could be required to disclose scheme data allowing clients to judge the quality of their advice under a new performance framework, which has already attracted positive early statements from two top 10 firms including 'big three' member Mercer.
The Spotlight solution, developed by IC Select, would collect existing scheme-by-scheme information from consultants and present it in a standardised way, allowing schemes to compare their risk-adjusted performance, relative to liabilities, and costs with various peer groups.
The initiative has already been presented as a potential remedy to the Competition and Markets Authority. IC Select is discussing sign-up with major consultancies, but said regulation may be necessary to force cooperation.
By making performance more transparent you can open a conversation about what the drivers of different outcomes were
Dan Mikulskis, Redington
Both the CMA and the Financial Conduct Authority have previously hinted that providing standardised information would benefit the sector. Redington and Mercer have signalled their support for the initiative’s goals ahead of seeing the final plans.
“Mercer is supportive of initiatives that enhance transparency for trustees and provide useful and meaningful information to help them assess providers. Mercer has signed up to the fiduciary management reporting standard and we will look closely at this new proposal,” said a spokesperson for the consulltancy.
The CMA expressed a concern in emerging findings of its investigation into investment consultants and fiduciary managers that “customers are not well-equipped to choose, and subsequently monitor the performance of, their provider”. The watchdog’s provisional decision report is expected in July.
Aon, JLT Employee Benefits, Hymans Robertson and Cardano declined to comment. LCP and XPS Pensions were unavailable for comment.
Building on fiduciary success
A reporting standard created by IC Select for fiduciary managers, which uses a similar performance measurement framework, has already been adopted by a significant majority of the market.
Previous suggestions that this standard could be applied to investment consultants were criticised for not taking into account whether advice is followed or not, according to the company’s founder and director Roger Brown.
“If you do that it’s going to cost a hell of a lot of money, and at the end of the day the results are not going to be that interesting,” he countered.
Instead, the firm decided to measure the output resulting from the consultant’s advice and trustee decisions, while Brown pointed out the Pensions Regulator's finding that 68 per cent of trustees either never or rarely disagree with consultant advice.
The reporting standard would involve a mandatory section allowing schemes to compare their performance, risk, value for money and costs with peer groups based on factors like scheme size, sponsor strength and investment objectives.
Schemes would also be able to compare their value for money against their consultant's other clients. Further discretionary content would cover areas like asset allocation, hedging, leverage and contribution policy.
Brown estimated that the cost of submitting information to the Spotlight database would range from £400 for schemes of around £10m in assets to £4,000 for the largest schemes, and said one consultant had already proposed to foot the bill citing valuable market insight.
Sign-up is crucial for transparency
For the reporting solution to be useful, IC Select said it would require sign-up from all funds from £5m to £40bn, and would require around 80 per cent of major investment consultants to cooperate.
“The chance of it succeeding without regulation are probably less than 50 per cent,” said Brown. The CMA said standardised reporting would make “value for money more transparent and comparable across different consultants”.
Some consultants have already signalled their support for such initiatives. Dan Mikulskis, managing director at Redington, said it would give trustees the ability “to ask consultants the right questions”.
Solving consultancy's transparency problem
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“The main driver of outcomes for schemes has been the strategic asset allocation,” he said. “By making performance more transparent you can open a conversation about what the drivers of different outcomes were.”
He said consultants should be expected to ensure that trustees are informed and comfortable enough to actually implement advice: "The role of a consultant isn't just to provide advice in a vacuum."
David Clare, a partner at consultancy Barnett Waddingham who leads the firm's fiduciary manager oversight function, was more wary of the solution and its potential adverse effects.
"I like the idea of greater transparency, I'm really nervous about it just becoming a box-ticking exercise," he said.
Aon takes last swipe at CMA
The Competition and Markets Authority has published the submissions of the so-called big three consultancies in response to its working papers, ahead of its provisional decision report in July.
The three consultancies argued that there is limited evidence to support a finding of an adverse effect on competition, with Aon launching several eye-catching criticisms of the markets regulator's process.
"There are areas where the CMA needs to obtain a better understanding of the complex market in which we operate, before it can reach meaningful conclusions," the response argued.
"The early discussion of highly speculative and intrusive remedies has, in this case, stifled competition," it continued, urging the CMA to rule out measures such as the forced separation of fiduciary and consulting services. "Some clients have been reluctant to purchase FM services and some TPEs [third party evaluators] are urging caution over the use of investigated firms."
Clare's principle concern was that the publication of performance figures would lead to a league table, with consultants consequently putting more focus on returns that flatter their results than delivering a solution that meets the needs of the client. He compared it to initial attempts to benchmark asset managers.
"The benchmark was there to help us decide whether we had been successful but then it started to drive behaviour," he said. "We allow each individual consultant, when working with a client, to come up with what's right for the client, rather than just a house view."
IC Select has said its disclosure is designed to show scheme performance in terms of their specific funding objectives, a measure of success Clare said was laudable but implausible: "Do I think they will be able to achieve it? No, to be honest."
